Yahoo Finance Financial Success in 2016 – part 7
We are now at the final stage o
f this seven part series to help you on your journey to financial success in 2016. You financial foundations are solid and are ready to be built upon.
Step Seven – Pulling it all together
Now you have been through all the previous exercises you are ready to make some decisions about where to invest you’re hard earned cash.
Before you do that though, you need to consider risk and diversification. All investments involve taking on risk. It’s important that you go into any investment with a full understanding that you could lose some or all of your money in any one investment. For instance while over the long term the share market has historically provided strong annual returns the long term does sometimes take a rather long time to play out and can have a few ups and downs along the way. Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level. However, those that kept adding money to the market throughout that time would have done very well for themselves, as the lower cost of stocks in the 1930s made for some hefty gains for those who bought and held over the course of the next twenty years or more. A similar thing could be said of the share market after the recent Global Financial Crisis, although the market recovered a lot quicker.
It is often said that the greater the risk, the greater the potential reward in investing, but taking on unnecessary risk is often avoidable. Investors can best protect themselves against risk by spreading their money among various investments, hoping that if one investment loses money, the other investments will more than make up for those losses. This strategy, called diversification can be neatly summed up as, ‘Don’t put all your eggs in one basket.’
Once you’ve saved money for investing, consider carefully all your options and think about what diversification strategy makes sense for you. Diversification can’t guarantee that your investments won’t suffer if the market drops. But it can improve the chances that you won’t lose money or that if you do, it won’t be as much as if you weren’t diversified.
Deciding which investments are best for you depend on when you will need the money, your goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal. For instance, if you are saving for retirement, and you have 20-30 years before you retire, you may want to consider riskier investments, knowing that if you stick to only the savings products or to less risky investment products, your money will grow too slowly—or, given inflation and taxes, you may lose the purchasing power of your money.
A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest. On the other hand, if you are saving for a short-term goal, five years or less, you don’t want to choose risky investments, because when it’s time to sell, you may have to take a loss.
The decisions around investing your money are very important ones. If you are not confident in your current knowledge you may want to meet with an Authorised Financial Advisor to help you make your decisions and/or put some more time into increasing your financial education. Remember Rome wasn’t built in a day! Smart decisions along with consistent steady steps over time will provide you with financial success. Good luck!
Lisa Dudson is a bestselling author and Registered Financial Advisor with over 15 years industry experience. Lisa offers financial advice through www.acumen.co.nz and co-owns the New Zealand's leading property investment agencies www.ifindproperty.co.nz & www.propertyladder.co.nz
