Resolvingto spend less and begin investing isadmirable, even more so if you decide to do these thingsat a young age. To ensure you end up with the rightportfolio for your needs however, all new investors (and even those who are more experienced) should give serious and regular considerationto the following four questions.
Whats my goal?
If you dont know why youre investing, itwill beharder for you to decide what you should be buying for your portfolio. Itmay also beharder to stay motivated, particularly during market downturns.
Perhaps youre saving for a house deposit, looking for a way to fund your childs university tuition fees or building a pot of money for your retirement. You may want to work less and draw on some of the income provided by your investments instead. So long as this goal is both realistic and relevant to you, we can move on.
What is my target return?
Once a goal has been identified, you need to knowhow much money youll need to realise it.
Lets return to the examples given above. According to Nationwide, the average UK house price in 2016 was almost206,000. A typical 20% deposit will therefore be 41,200. With tuition fees now at 9,250 per year, youre looking at almost 28,000 to fund a three-year degree course. If youre wanting a retirement income of 20,000 a year, youll need a pension pot of 400,000 if you plan on livingfor another 20 years after quitting work.
Clearly, these values will change. House prices fluctuate; tuition fees and living costs will rise over time. Nevertheless, they give you an idea of the challenge that awaits you.
Whats my time horizon?
This is all about considering how long you have to grow your capital, from the moment you begin investing until you reach your final goal. If youve recently had a baby and wish to save for his or her time at university, for example, you have roughly 18 years to do so. Thosesaving for a house depositmay be looking to invest over a muchshorter time period, of course.
Again, you must be realistic here. Whileshares provide a better return over the long term compared to bonds and cash, their performance over a few years canbe far more volatile. If youll need it back within five years, the stock market may not be the best home for your money.
Whats my appetite for risk?
Ascertaining your tolerance to risk is key if youre going to pick the right investments to hit your target return over your estimated time period.
Clearly, someone looking to make a significant amount of money from the stock market over a relatively short time period will need to take on more risk andgravitate towards the lower end of the market spectrum. Those who are more risk-averse should stick to blue chip companies, while appreciating their share prices can also drop on bad news or general market jitters.
Asmentioned at the outset, its a great idea to start investing at a young age since this allows a person to take on more risk for the possibility of higher returns. Even if some of their investments dont work out, they should have sufficient time to make amends a luxury some wont have.
If you’ve chosen 2017 to be the year to start your investing journey and already have answers for the questions above, you’ll definitely want to read a special reportpenned by the experts at the Motley Fool. Not only could their tips save you a fortune, they could also help you leave the stock market with a cool million in your back pocket.
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