Investment Basics

When investing it is essential that you have a goal and a strategy to help you reach that goal. This means you should always start by looking at your goals. This in turn will determine the sort of investment portfolio you need to create in order to achieve a well balanced investment portfolio.

There are many types of investments to choose from and if you don't do your research and assess your goals it can quickly become confusing. This is where your goals, your tolerance to risk and your investment style all combine to create your strategy.

Understanding your risk tolerance and your investment style will help you to make wise investment choices. The main investment styles will tie into your risk tolerance and these are defensive, conservative, moderate (also known as balanced), mildly aggressive (or growth) and aggressive which takes you through the investment spectrum of low to high risk.

Naturally your financial goals will help establish the style of investing you use. If you are in your twenties and saving for retirement you can afford to use an aggressive style of investment because of the length of time until you require the funds. You will have a number of years to recover from any negative market declines.

However if you are saving to buy a home in the next year or two, your approach would be to use a conservative style. You need to match your goals with your style.

Whether you are investing in a conservative portfolio or a more aggressive one you need to diversify your investments. While a conservative strategy designed for a short-term home purchase should not include shares you should still diversify within your portfolio. This means spreading investment among several short-term money market providers.

Diversifying your longer-term investments should include various shares in different industries. It should include purchasing bonds, investing in money markets and in property. These are known as the assets classes. The key to diversification is to invest in several different asset classes and not just one.

It is your risk tolerance that will indicate the percentage you apply to each area of asset class. As a guide a balanced investor (middle of the road) is generally 50 percent in growth assets such as equities and 50 percent in income assets such as bonds.

In conclusion deciding on the style of investment strategy you will use is determined by your financial goals and your risk tolerance. Regardless of the type of investing you do, you should carefully research the investment and gain all the facts. Whatever style you choose never invest all your money in only one investment, diversify for a well balanced investment portfolio.

Lyn Bell has been in the finance industry for more than 30 years and is a Certified Financial Planner. She has helped many clients achieve their financial goals. Sign up to get Lyn's free newsletter SoundFinance News and receive a free gift.

Please note this article does not contain specific advice and is for information/education purposes.

A disclosure statement is available free on request.