The Golden Rule of Investing
Written by R. A. Stewart
The one question you MUST ask yourself before investing your money is, “Can I afford to lose this money?”
Only you can answer this question, but…
that depends on when you need the money and what the loss of your investment will mean for your other goals.
For example if your goal is to save for a car within the next 18 months or so then this is considered a short to medium term goal which means that investing in something with low risk is imperative. Growth funds on the share market and bitcoin are out of the question because the loss of your investment could mean that you may not be able to purchase that car. It really comes down to how badly you require that car. If it is essential for you to get to and from work then you cannot afford to lose the money that you are saving for a car.
The same is said for money which you are saving for a house deposit but it really depends on how soon you require the money. If you are looking at a 10 year timeframe then investing in growth funds may increase your savings faster but no one can predict when and if the markets will crash so it is really a risk to invest your house deposit money this way but the flip side is that if there is a 1987 style crash then house prices will also tumble so less money will be needed to purchase a house.
Can you afford to lose your retirement fund? The answer is no but…
Where your retirement fund is invested all depends on how soon you need the money. Some financial advisors will tell you to scale back the risk as you are approaching retirement but the problem is that if you start doing that when the markets are down you are taking a loss and missing out on any gains which will happen when the markets rebound. The other thing to remember is that you are not going to just spend all of your retirement funds as soon as you retire. You may live another 20 years and that is ample time to recover from any crash which will occur near your retirement. Of course you may want to tick off as many items off your bucket list as you possibly can so the early stage of your retirement will be when you will want to do as much as you can. You certainly do not want to sit in an old folks home at 90 with any regrets.
The size of your retirement fund when you require it is determined by where you have invested your money. If you just saved your money and just left it in low interest accounts you will lose.
How?
Because inflation will erode the value of your money. Then there is tax on the interest.
It is important to learn how to invest for a better outcome and where you invest should be determined by your age and how soon you need the money.
Saving up for a house is the biggest single investment in one’s life with a car being the second biggest. Not everyone has ever bought a house or car but have saved money for other things; here is a list of other items which many people are spending their money on:
*Paying off a student loan
*Saving for an overseas holiday
*Saving for a business
*Paying off a medical/dental bill
These are major items. It has to be said that saving for a holiday can be considered discretionary spending and therefore will not cause you a great deal of hardship, just disappointment if you lose this money in the share market.
Setting priorities is an important part of managing your finances and the one question that should be asked is, “Can I afford to lose this money?”
Disclaimer: The information in this article is of the writer’s opinion and may not be applicable to your personal circumstances therefore discretion is advised. I may receive a small commission if you sign up for Sharesies or Coinbase.
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