As a Financial Planner I often field questions about investing. This has led me to put pen to paper, so-to-speak, and blog on some of the key principles underpinning investing.
Identifying your risk profile
My role as a Financial Planner is to assess people’s attitude to investment risk. This means understanding investment objectives, attitude to investment losses and market volatility, and investment education. Understanding risk profiles goes a long way to determining which investments and asset classes are most appropriate.
Time in the market vs. Timing the market
This theory in its simplest form refers to taking a long term view to investing and can be summarised using a sports analogy. Sports commentators often try to predict the winners at the start of a season, only to see their forecasts fade away as their chosen teams lose due to poor performance, injury or other similar activity. Likewise, market timers often try to predict big wins in the investment markets, often to be disappointed by the reality of unexpected turns in performance. For those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the alternative.
One strategy widely recommended in order to smooth out volatility in the long term is ‘Dollar Cost Averaging’. This means that by making regular purchases or regular contributions to an investment, the investor removes the market timing risk.
Re-evaluate your portfolio regularly
The buy and hold principle doesn’t mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. Most experts say annual reviews are enough to help ensure that the investments you select will keep you on track toward meeting your goals.
Start investing early
The power of compound interest is allowing your interest to accumulate and add on to your lump sum. You start to earn interest on not only the principal amount but also the
accumulated interest from prior periods. That’s why it’s important to start investing as early as possible and to add to your investments regularly. Feeding your Investment regularly results in an automatic savings program, and even a small regular investment can grow into a substantial sum over many years. Every dollar makes a difference!