4 questions to ask yourself
1. How much risk can you tolerate?
With higher-risk investments, there’s a greater chance you could lose some or all of your money. But higher-risk investments also have the potential to grow your money faster. Ask yourself if you’re comfortable taking on more risk if it means greater returns. Or would you be more comfortable making less and knowing your money will be there when you need it?
Take this quiz to see how comfortable you are with risk.
2. How much do you expect to make on your investments?
Figure out how much of a return you’ll need to make on your investments to reach your financial goals. Keep in mind that to get a higher return, you often have to take more risk. If meeting your expected returnExpected return Estimated value of your investment in the future. Tells you the overall profit you might expect – either as income (interest or dividends), or as capital gains (or losses). Often expressed as a percentage.+ read full definition means taking on more risk than you’re comfortable with, you may need to adjust your goals.
3. How long do you plan to invest for?
Your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition time horizon is the amount of time it will take you to meet your goals. Your time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition could be short termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition, like saving for a vacation in 6 months. Or it could be long term, like saving for retirement in 20 years. Your time horizon is a key factor in choosing investments. For example, if you’re investing for the short term, you may want to choose investments that guarantee your return, so your money is there when you need it. If you’re investing for the long term, you may choose to take more risk with your investments.
4. Do you need quick access to your money?
LiquidityLiquidity Refers to how easy it is to change an investment or asset into cash, without affecting the price. Liquid assets include most stocks, money market instruments and government bonds. Your home or other property is not very liquid.+ read full definition is a way to describe how easy it is to get your money back from an investment. Cash and bank accounts are very liquid. You can usually get your money right away and get it easily, but the returns are low. Investments that are less liquid may offer a higher potential return, but also may come with more risk.
6 steps to investing:
- Set your goals
- Know your investing personality
- Create your plan
- Choose your asset mixAsset mix The percentage distribution of assets in a portfolio among the three major asset classes: cash and cash equivalents, fixed income and equities.+ read full definition
- Choose your investments
- Track your progress
- Risk tolerance
- Expected rate of return
- Time horizon
- Liquidity needs