You have much more potential for growth if you invest your money than you do if you leave your money in a savings account. In the current economic scenario, with interest rates still at bottom, you could be losing a lot by keeping your money in a savings account because inflation will infringe upon your returns and you could lose money in real terms.
On the contrary, by investing in the markets you may achieve an inflation-proof return for meeting your long term financial goals. But it’s also important to understand that you are taking a risk when investing your money. The greater the risk you take, the greater the potential for growth. But with more money, come more risk and the chance of losing your money.
You should be comfortable with the risk factor even before you consider investing your money. No investment is risk free and there are no guarantees. If you cannot accept it, you are not ready for investment. You should consider certain factors before making financial decisions.
Have clearly-defined goals. By having clear goals you will be able to decide the amount of risk you need to take to achieve what you want. You may not have a particular reason for investing, but be sure as to what you want from your investment.
Once set; work out a time frame for your goal. This way you will be clear about your return from your investments and know if your goals are realistic. Your age and health are important factors to consider. If you have short-term goals (less than five years), you should stick to cash savings because, if your investments fall in value, you might not have time to recover your losses before you need the money.
Medium (five to 10 years) and long-term goals (10 years or more) are appropriate for investment, but some investments become less appropriate with time or as you get old. You have less time for your money to recover if it falls in value and, if you’re retired; your capacity to earn is diminished.
Understanding the risks you’ll encounter when investing and deciding the amount of risk you are prepared for, is fundamental. You might be planning for long time term and plenty of cash to fall back on, but if you don’t think you would sleep at night if the markets became volatile, it is probably going bit too far.
Be realistic about your investment affordability. Assess all of your liabilities, like debts, insurance premiums, pension contributions, savings and living costs, and then assess the cash you can spare. Investing works best when done on long term basis, so think again if you think you might need cash in the next five years.
Many investors make their own decisions, without advice, but this requires time, knowledge, experience and confidence. If you rely on professional financial advice, chances are you’ll be able to ensure that your investments are tailored exactly to your needs.