Written by R. A. Stewart
When it comes to investing, it is important to invest according to your risk profile. This means diversifying your investments in several asset classes in order that you may take advantage of the highs in each asset class, and at the same time, minimizing the effect of a downturn in one of those asset classes.
An asset class is a group of companies which have similar characteristics. They react to economic events the same way. A financial advisor will focus on asset classes as a way to reduce the risk and help investors to diversify their portfolio.
Each asset class offers different levels of growth and risk. Some asset classes such as cash in the bank are focused on capital preservation.
Your choice of asset class has to be aligned with your investment goals.
Equities such as stocks and shares offer potential to make a good capital gain on your money, but are riskier than cash in the bank.
Physical assets such as Real Estate and Gold offer chances to grow your wealth, but there are downsides to both. Investing in your own home may be a worthwhile investment for you but purchasing an investment property may not if it means that all of your money is tied up in that property.
Your goals is the one factor which determines which asset class you are going to invest your money in. The question which has to be asked is, “What is the purpose of this investment?”
Once you have answered this question, you are left with your risk profile.
It is important to stress that you can have money invested in growth and conservative funds in different investments at the same time without it affecting your risk profile.
Here is an example:
A person in their twenties has 40+ years till retirement, therefore an appropriate investment for their retirement fund, (Kiwisaver in New Zealand) is growth or balanced funds.
That same person may be saving up for a car and may have less than 12 months before they have saved enough for their purchase. Investing in conservative funds is right for them, though as they get closer to the time they require the money, depositing it in an ordinary savings account may be the best option.
Time is the major factor to consider when setting your money goals. The person who has time on their side is able to invest more aggressively into growth funds because they have more time to recover from a market downturn.
This does not mean that you should invest haphazardly, but rather taking calculated risks. The beauty of investing in managed funds is that your funds are invested on your behalf by fund managers and it is their job to ensure that your investment returns a profit.
Cryptocurrency such as Bitcoin, Ethereum, and Dogecoin are an asset class, albeit, a risky one with the potential for high returns. If you are going to get involved in this then only do so with discretionary spending money. The same applies to investing in anything which is outside of your risk profile.
You could be aged 70 or 80 but still fancy investing in growth funds. Do this if a market meltdown is not going to affect your lifestyle. New Zealand financial advisor Frances Cook has a formula for calculating what portion of your portfolio should be allocated to shares. You simply deduct your age from 100.
I do know of some folk who do not follow this rule, and I am one of them. My view is that I may avoid the effects of a market meltdown if I followed Frances Cook’s formula, but then I am taking advantage of a buoyant market.
Its a decision investors must make for themselves and if it all turns to custard then you have only yourself to blame.
About this article
The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.
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