Figuring out your investment style is important when you start with investing. Determining the right investment style for you is necessary because it has a great influence on the return of your portfolio and for reaching your goals. Make your housework very carefully and check regularly if your investment style didn’t change since you started with investing. Your investment style will probably not be the same on the age of 20 years as when you will reach the age of retirement.
Your investment style is the basic to make the right decisions of investing your money. Which are now the factors which have an influence on your investment style?
1) YOUR AGE AND YOUR RISK TOLERANCE
Risk tolerance is something individual and there is always a certain risk that you lose some money. If you can’t live with some losses of your investments you can better put all your money on a savings account; you don’t lose money but your return will also not be high. The time of high interest rates on savings accounts is gone and alternatives are necessary.
Your age is important to determine your risk tolerance; probably you are willing to take more risks when you are younger than in case you are 60 or more. You don’t want to lose your money which you saved before your retirement.
2) YOUR CURRENT INCOME AND YOUR EXPECTATIONS FOR THE NEAR FUTURE
An important issue to determine your investment profile is your annual income and the expectations for the near future. Can you afford it to save a lot of money every month or only small amounts? Is there a possibility of a growth of your income the next years? The answer to these questions is important to decide for choosing a profile with a high risk factor.
A high risk factor means that you invest for the long term in shares or mutual funds which invest in a high percentage of shares. When your answer is positive you can consider choosing for an aggressive investment style if you are not worried that during certain times your invested money drop with high percentages. On the long term your return will mostly be higher than a defensive profile if you pay attention on the necessary diversification of your portfolio.
3) YOUR PLANS IN THE NEAR FUTURE
Maybe you are planning to buy a house next year or within a short time or you want to do some expensive purchases. In this case it is more likely to choose for a defensive investment style because you will need a lot of money in the near future and if you should invest your money in shares or mutual funds which invest for a high percentage in shares you are not sure that you can sell a part without losses for buying a house or the purchases you want to do. Probably you need to borrow for buying a house but it is often better to use a part of your invested money for limiting the amount of your loan and avoiding high monthly pay offs of your loan.
4) YOUR SAVINGS GOALS
Do you save for the short term or for the long term? Saving for the short term means that you are planning to use it within a few months or a few years. In this case you can best consider for a defensive investment strategy and put the greatest part of your money in your savings account. Otherwise you can consider opening an account for several months with a higher interest rate; you know how much you have to save every month to reach the amount you need.
When you are saving for the long term or maybe for your retirement and it takes more than 20 years you can consider investing a certain amount more in an aggressive style. Probably you need money for the short term and the long term. Try to make a good plan for dividing your savings according the style that fits you.
5) KNOWLEDGE OF THE STOCK MARKET
If you are not interested in the stock market or you don’t have the time to follow up the stocks it is better that you don’t take the risk to buy some shares. Investing in shares is more than only listening to some people who advise you to buy shares of a certain company or selecting some great companies which make often high profits.
In this case you can consider buying a mutual fund which invest according your investment style (by example 50% in shares and 50 % in bonds).
Revision of your investment style is certainly necessary every 5 years and sometimes even sooner. You start always with a certain investment style. By example you start on the age of 30 years with an aggressive investment style and when you have reached the age of 50 years you reached by example on average a return of 10%; you surely don’t want to lose this money. It is more likely to adapt your investment style safer; maybe you can choose the next ten years for a dynamic investment style (50% shares and 50% bonds). When you have reached the age of retirement it is best that you switch to a defensive investment style (75% in bonds and 25% in shares.
When you have difficulties to figure out your investment style there are several websites available if you browse through the different Internet pages. I advice you to consult the website of your bank and you can probably find a list with questions to determine your investment style.
After filling in all these questions you will receive the result of your investment style at this moment. The site will show you immediately if you are a conservative; a dynamic, a moderate aggressive or an aggressive investor and it is important that you follow the trend of these investment styles.
WHAT IS THE MEANING OF THE DIFFERENT INVESTMENT STYLES?
The different investment styles determine which percentage of your savings you have to invest in bonds and shares:
a)treasury style : cash, term savings accounts and treasury money market funds
b)defensive style : 25% in bonds and 75% in shares
c)dynamic style : 50 % in bonds and 50 % in shares
d)moderate aggressive style : 75% in shares and 25% in bonds
e)aggressive style : 100% in shares
Figuring out your investment style is important for taking the right decisions with your investment. It is important for the short term and the long term and also when you are making your budget. Pay a lot of attention on your investment style and don’t take too many risks if you can’t afford it!