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INVESTMENTS
Are You Getting a Good Night's Sleep?
The starting point of any financial plan should be to identify your lifestyle goals and then to tailor it to your current and ongoing financial ability to achieve them, not the traditional approach which simply bases your investment plan on your willingness to take on risk in order to chase unrealistic returns. Filling in a questionnaire on your approach to risk simply helps your financial planner to determine what product he or she can hopefully encourage you to buy.
Work out what you want your money to do for you
In the early years of our working lives, few people have capital to invest because they are still building up their assets and have major financial commitments, such as paying off home loans or paying for their children's education. However, it is important that you structure your finances properly at the outset so that you can get out of debt and start investing your money to meet your eventual lifestyle goals as soon as possible. As we get older, our responsibilities shift from providing for the family's needs to providing for our retirement.
It is not difficult to invest successfully over your lifetime as long as a sound framework is in place that will structure your decision making. Emotions can often influence your decisions and in doing so will only cause you to make mistakes that will derail your financial plan if not kept out of the equation. Even without the traditional questioning, research has found that most people invest aggressively when the markets are performing well, while the same people adopt a conservative approach when the markets are falling.
Start with setting your lifestyle goals
You need to identify on what you wish to spend your money both now and into your retirement years. A key of this is to draw up a budget, because this will enable you to know how much money you can afford to spend and how much you have to invest to achieve your lifestyle goals.
The next step is to calculate the return you need on your investible assets in order to achieve these goals. It is important that you assess the returns you need from your investments on an after-inflation basis, because your money needs to keep pace with the growth in the cost of living.
The returns you need to achieve on your investments must be attainable in the markets. You cannot plan your financial future around a 25% return on investments. If there is a need to achieve this kind of return, you must reassess your lifestyle goals until the returns you require can be realistically achieved. A good financial plan is a road map to the future, not a wish list!
Next you must choose the right mix of assets to realistically achieve the returns that you need. In doing this there are four main asset classes to consider: cash, fixed interest, property and equities and you should understand the risk / return relationship of these various asset classes. Your financial adviser should also be able to explain them to you - if he or she cannot, then find another adviser.
You must then consider who you will choose as investment managers of the equity, fixed interest, cash and property components of your investment portfolio. This requires specialist skills and should not simply be left to your adviser who does not have the necessary qualifications or experience. A professional portfolio analyst will choose the right blend of assets to achieve the return you need. Most financial advisers will outsource the task of managing an investment portfolio to a professional
You also need to be aware that portfolio managers use two main investing styles: active and passive investing. With an active investment strategy, the manager tries to out-perform a market index or benchmark. Such managers believe they can beat the general market and achieve higher returns for their clients. A passive strategy is followed by managers who believe the markets cannot be beaten. These managers construct a portfolio which mirrors an index.
It is important to rebalance your portfolio regularly once the correct asset allocation has been identified for your needs as portfolio weightings can change when markets rise and fall and leave your asset allocation looking different to the way it was first set up. Without the requisite expert advice, greed and fear of short-term peaks and troughs in the market can distract you from your long-term investment strategy, leaving you either over - or underweight in certain assets classes, depending on how the market has performed.
Finally the "sleep test" is an important one for all investors. If your investments keep you awake at night, you are in the wrong investments. If you cannot change your lifestyle so that you have more money to invest, then you may have to learn to live with the risk associated with achieving your returns. This is often the reason why many consumers fall for get-rich-quick schemes and lose their shirt as a result.
You should have a clear idea of what you need from your money. This will enable you to have a better understanding of the returns you need to achieve over a certain period of time. Most people can identify their goals fairly easily. However, because they often fail to manage the investment horizon, they don't achieve the desired outcome, and this leads to disappointment and frustration.
You should seek the counsel of a properly qualified financial planner who can help you to achieve your financial objectives.
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