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‘To thine own self be true’ is an old but well-known adage that was penned by William Shakespeare some five hundred years ago. However, if you are new to investing the phrase is as relevant today as it was then.
Before you start investing you need to know certain things about yourself and your own personality. You also need to have an idea of how you want your future to look.
Before starting out on an investment plan you need to know how much you can actually afford to invest. You also need to know what your objectives are and what you hope to achieve. But perhaps most of all you need to know how you will react to risk. Your professional financial adviser will also want to know this too.
The first thing you need to do before embarking on an investment plan is to know your current financial status. You need to know how much money you have, how much money you owe and how much money you need to live. In short, you need to know how much you can afford to invest.
Generally speaking most people will have the following financial commitments – mortgage, loans and credit cards, living expenses, insurance, car costs, school fees and general entertainment. It is the money they have left over after having paid for all of the aforementioned commitments that is generally used to meet their investment needs.
Once you have determined how much you have to invest you can then set your financial objectives. A set of typical objectives will normally include retirement, lifestyle changes (ie weddings) and plans for the children and family (such as education). These objectives can be further broken down in to long-term, medium-term and short-term goals. A typical long-term objective would normally be retirement (depending on your age of course!).
Once the objectives have been set you can then decide on the type of investment you will need to put in place to enable you to fulfill your plans. You can even determine the timeline required to reap the reward that your investment will (hopefully) reap. Simply put you need to calculate how much you will need in the future after taking in to account the effects of inflation and interest rates.
Needless to say it is important to match the investment to the objective – and that’s where a professional financial adviser can help. As an example if you are investing to put your children through college you will probably choose a relatively low-risk investment to avoid disappointment when the time comes. On the other hand if you are in your twenties and you start investing for your retirement at 60 you may choose a riskier investment because you know you will have plenty of time and opportunity to make up any shortfall.
However, you might not like the idea of risk at all – no matter what age you are or how much time you have to earn and invest. Tolerance to risk is a very personal thing. It is something that you would do well to know about yourself before embarking on any investment plan. After all you do not want to find yourself panic-buying or panic–selling when the markets become volatile. To do so would normally be a surefire way to lose money.
To determine your attitude to risk you might want to ask yourself the following questions: How much experience do you have with investments? What level of fluctuation in your investments would you be comfortable with? How much have you put aside to invest? Some people are more risk-tolerant than other. Some people are also more prone to becoming emotionally attached to their investments. Although this is difficult to ascertain at the outset it is a factor that can cost you dearly.
Fear and pride are often an investor’s biggest weaknesses. Fear can cause an investor to sell when he (or she) should hold. Pride can cause an investor to put off investing in a worthwhile product because he (or she) is afraid that they might lose – and this would mean failure.
To guard against this it is important to realise that investments – by nature – can go up as well as down. However, armed with a long-term outlook, a sensible plan and some ‘inside’ knowledge about our own character many of us are able to meet their financial objectives. But before embarking on an investment plan remember the words of the great bard William Shakespeare – “To thine own self be true”.
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