Mixing the investment is critical in one reaching the financial goals.
Making investments is an intelligent way to use one’s earnings to mint more money at later stage. But it is not that simple as it appears. The terms stocks, bonds and mutual funds can be intimidating terms and concepts for a beginner. Hence, it will be ideal for one to learn the economics basics before jumping in to the investment wagon. That is, before making the first move, one should ideally have educated themselves on the intricacies of the economics and must possess a decent personal investment strategy to backup the business.
A competent financial advisor can help you to devise an effective personal investment strategy. He/she could help you in deciding the appropriate mix of asset types, the stocks, mutual funds or bonds, in the investment portfolio.
Now from an investor’s point of view, two things are critical in determining the effective investment mix. They are the Time Horizon and Risk Tolerance.
Time Horizon – as the term suggests – has some bearing on the time factor. That is, Time Horizon refers to the time period you have ahead before you reach the financial goals.
In that context, if you are young and is in a saving or accumulation phase, the investment mix should be based on the time period of when you would need to use the money. In such cases, the farther you are from the goal, more affordable are you to invest in volatile or risky investments such as stocks. It further implies that shorter the time horizon, the more conservatively should one be in his/her investments.
If one is in the distribution stage – like the retirement – his/her investment mix should ideally be determined by the requirement of income from his/her portfolio. A financial advisor can help one in effectively deciding the investment mix proportions.
Risk Tolerance is one’s ability or attitude towards tolerating the risk factor. The extent of risk one is comfortable with is vital in deciding the investment mix. If one is averse to taking risks, then he/she may prefer to resort to more conservative investment techniques even if there is more chance for increased returns.
But there are no standard solutions that determine the right investment mix for every individual. It is a function of continuous planning and adjustments to current financial trends.
While time horizon and risk tolerance are critical factors, other factors like your changing financial status or shifting jobs can also influence the investment plans. The investment mix should ideally be flexible according to life changes and shifting goals. If one is not able to maintain the synchronism between the investment mix and financial goals, again get back to your financial advisor.
The appropriate investment mix is a product of a financial advisor’s planning and the investor’s common sense. It needs continuous follow up and constant reviewing so as to reap the maximum benefits. On a safer side, the investor is advised to get his/her portfolio evaluated by the financial advisor in a yearly basis regardless of whether or not his/her circumstances have changed.