Any idea of sound investing that has nothing to do with stock
market?
Like when you notice the street vendors who
are usually selling different items: sunglasses, hats, umbrellas. Items can be
used in sunny days while some in rainy days, different items for different
seasons at a time. To diversify the
product line, the vendor has to sell different items to reduce the threat of
losing money at a given time. Make sense? That’s the basic of allocating assets
and diversification.
Sound investing is an approach to distribute
money to different investments in order to gain more or to make up from one
losing investment. The basic in asset allocation is to distribute the
investment portfolio to different asset categories: cash, bonds, stocks, etc.
Allocation of assets work best depends on each
preferred time horizon and the willingness to tolerate risk. Time horizon is
the preferred # of days, months or years to invest to different asset
categories to attain the financial goal. If you prefer for a longer time
horizon, you might be comfortable on a more volatile or riskier investments
where you can wait a slow economic cycle; whereas, if you’re saving up for your
child’s education, you might take for a less risky investment due to a shorter
time limit.
Risk tolerance is the willingness to gamble
for losses to get more potential returns. There are types of investors
according to risk. If you are an aggressive type of investor, you are more
likely to have high-risk tolerance that is willing to take risk of losing money
to get the desired result; it’s like seeking two in the bush. But, if you choose to preserve your original
investment, you are likely a conservative type of investor.
Importance of risk
Reward comes after risks, as the saying
goes no pain, no gain. However, you have to understand what you have to risk and
what reward you’ll get. Because, to risk, there are more chances that you could
lose all. There’s a reward in taking risk, but, understanding of what you risk
and what you’ll get is the key to get your desired investment return. For
example, if your financial goal has a long time horizon (retirement), carefully
investing in assets that are riskier is the best method to make more money. Otherwise,
if you have short term financial goals, cash investments might be a good
option.
Understand your choices
Securities and Exchange Commission won’t
recommend any investment products. Therefore, before you leap into investing,
you have to know what investment products exists, how would you like to risk,
which investment product would suit your goal, risk appetite, and money you can
afford to invest.
Investments to choose from are stocks,
bonds, mixed funds (stocks & bonds), money market funds/deposits, mutual funds
(stocks & bonds through investment companies- Insurance and Asset Management
Company), UITF (trust fund through banks), real estate investment trust fund, exchange
traded fund, and government securities (T-bills, notes, municipal bonds). Investing
in mix asset categories can be a good strategy. Following are the review for the
3 major asset categories:
·
Cash- cash equivalents:
savings and time deposits, money market funds and deposits, government
securities. These are the safest investment but gives lowest returns. There’s a
slim chance of losing money for this kind of investment. Investment losses in
cash equivalent do occur but not frequent. The only thing that is most concern
of investors in investing cash is inflation risk. Once inflation overtakes, it
will take away all investment returns and reduce the cash value over time.
·
Bonds- Usually less risky and gives moderate return compared to
cash. When you reach your financial goal, you might increase your bond holding which
is attractive to investors despite for lower growth potential. Similar to
stocks, other bonds offered carry higher risk but higher returns.
·
Stocks- Historically, stocks are the greatest risks in investment
but provide highest returns, if you know what and when to invest. Stocks offer
greatest growth potential; sometimes it hits home runs, sometimes it strikes
out. There volatility makes stocks a risky investment for short term. Others
who invested in stocks have lost money and losses were quite dramatic. But
those who have been endured the volatile stock returns over longer periods of
time have been generally rewarded with greatest returns.
Above are the most common investment in
asset categories. You would likely choose any of the asset categories for your
retirement savings plan or education (college) savings plan. There are also
asset categories like precious metals, commodities, real estate, and private
equity. Other investors consider those asset category would suit their
financial goals. Asset categories have specific risks; therefore, before you
invest, understand the risks of what you invest and make sure the risk you take
is bearable and fit for you.
