Investing is putting your money to work to create income or grow your wealth. It’s about understanding your current and future needs and developing a plan (or investment strategy) that will help you move through life. And it starts with setting some goals.
Before you invest, it’s important you set realistic goals. Take the time to work out why you’re investing, how much you have to invest and when you need a return.
Once you have these foundations in place, it’s easier to make decisions about your investment strategy.
As things change we can help you
You’ll have different financial needs at different life stages. Marriage, a baby, a move, an inheritance or a divorce can have a major impact on your lifestyle and financial goals.
We can help you work out the most effective investment strategies so you can;
- establish your goals and financial plan
- build wealth and accumulate assets
- maximise and protect your wealth
- consolidate wealth for the future
- reap the rewards and enjoy the life you want
Diversification - spreading your investment funds or "not putting all your eggs in one basket" - is considered by specialists to be one of the fundamental keys to effective investment. Smart diversification allows you to factor out much of the volatility, and hence risk, associated with your investments. The key is to shape a balanced portfolio of investments under your overall strategy, rather than considering investments individually.
There are several forms of diversification:
Company diversification: where you counter the potential for falls in the returns of one company you've invested in, by purchasing shares in other companies not exposed to the same falls. For example, say a company that produces pulp and paper experiences a downturn in demand due to an oversupply on the world market. There is a subsequent drop in profit, and the share value falls. At the same time you've invested in an energy company that is operating at a time when demand for energy is high. By ensuring you're not exposed to one particular sector, you reduce the risk to your overall share portfolio.
Regional/geographical diversification: where you buy some shares in the New Zealand market and some in other parts of the world where economies are larger and there are industries which are not found here. This is a means of factoring out under-performance by the whole share market in any single country, and expanding your options for company diversification.
Manager diversification: where you don't have enough funds to purchase your own diversified parcel of shares so you buy into a managed fund which enables smaller investors to participate in a wider range of investments. You can diversify even further by choosing several different fund managers, as each tends to hold expertise in different areas.
Asset class diversification: where you buy into a variety of asset classes to counter downfalls in other classes. Investors who spread their risk among several asset classes should expect a better risk-adjusted return than those who use a single asset class.
Time in the market
Time is another critical factor in determining the earning potential of your investment portfolio.
If you've got time on your side to reach your savings goal, you'll be able to consider the long-term trend of the higher risk, higher potential earning investment options. Most of these, such as shares, require you to ignore short-term fluctuations in value (which you can also account for by diversifying and stick with them for a period of seven or more years in order to achieve a more desired return.
Of course some short-term investors may get lucky and buy a high-risk investment at a time when it is beginning a rapid upswing in value - and be able to make a big gain in a short period of time. But if you're not careful it's equally possible that the opposite will happen.
In general, if you haven't got time on your side to reach your savings goal (say, you need money for an overseas holiday in a year's time) share-based investments, even if fully diversified, are not suitable. Short-term investment options, such as a one-year term deposit with a bank that offers a specified rate of return, are the ones to consider.
It's vital that you have a clear understanding of what you're actually aiming for by investing. Your objectives will directly affect the type and proportion (or asset allocation) of investments you make, the time frame you're working towards, the total amount you should invest and the rate of return you should aim for. If you're unsure, seek expert help. You can set up an appointment with your choice of specialist adviser right here on line.
Factored into your strategy will be your tolerance of investment risk and, accordingly, the degree to which you'll need to diversify to cover risk. Your attitude towards risk, or your "investment profile", will have a significant bearing on asset allocation within your investment portfolio.
Once you've established your investment strategy, stick with it - and stick with the investments and the time frame that you've selected to fit your strategy. Avoid the temptation of bailing out if you see the value of investments fall unexpectedly. Equally, avoid the temptation of withdrawing from your investments if they experience an attractive short-term gain in value. Investment specialists advise that achieving the desired result from your portfolio requires a generous dose of both patience and discipline!