Everyone has different financial goals with differing priorities, and so it's natural that individual investment choices will vary from person to person. However, no matter what your individual goals are, many of the same factors are involved in making the best decision for your own particular situation. Below, we'll look at three of the most important factors and how they affect a smart investing strategy.
Time horizon
One of the most important considerations in investing is how long you have before you'll need to get the money you're investing back. For example, if you need to spend your money next week, then you'll invest it differently than if you have 30 years before you expect to need it.
In general, the longer you have before you want to spend your money, the more aggressive you can be in investing it. Individual stocks, as well as mutual funds and exchange-traded funds that focus on stocks, can be a valuable component of a portfolio with a long time horizon. By contrast, if you only have weeks or months before you'll need your money back, bank savings accounts or certificates of deposit help avoid the risk of an ill-timed downturn in the stock market leaving you with an unexpected loss.
Available money to invest
Having a diversified portfolio is an important way to reduce risk. However, if you have a limited amount of money to invest, then putting together a well-diversified portfolio of individual stocks can be difficult.
If you have plenty of investment capital, then individual stocks and other investments make plenty of sense. For those with more modest sums to invest, mutual funds and ETFs provide ways to pool money with other investors in similar situations, giving you exposure to a diverse set of investments even with minimum investment requirements.
Tolerance for risk
Finally, one of the most important factors in choosing appropriate investments is knowing how comfortable you are with taking on the risk of investing. Certain types of investments see larger changes in their value than others. It's important to be able to stick with an investing plan even when the financial markets behave badly.
Those who are comfortable with the daily ups and downs of the market should consider aggressive strategies that concentrate exposure in areas of high return and volatility. By doing so, you can maximize your prospective investment gains. On the other hand, if even gentle movements in the markets make you nervous, then a less aggressive portfolio will help you sleep better at night, even if it doesn't maximize your expected return.
By taking these factors into account, you can tailor an investment strategy that's best for you. Doing so will put you in the optimal position to succeed with your investing.
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