2. How much risk can you afford to take?
As a general rule, the more money you stand to make, the more money you could potentially lose. This means you typically need to take on more risk to achieve higher rates of return. Of the money you’ve set aside to invest, how comfortable are you with the possibility of losing it? What impact would this have on your lifestyle if you were to lose it? If it would have a big impact you may want to consider reducing the amount or looking at less risky investments.
Investment types can be categorised as growth or defensive. Defensive investments (like a savings account or term deposit) focus on generating regular income over time while growth investments (like shares or property) aim to increase in value over time as well as potentially paying out an income. Typically defensive investments are less volatile, while growth investments can fluctuate but may produce higher rates of return.
3. When do you need your money?
Generally the longer you’re able to stay invested, the less investment risk you are exposed to as your investment can weather any fleeting changes in the market.
Your age may shape what investments you make. If you’re just starting your career you may be willing to take more risk as you have longer to make the money back. If you’re towards the end of your career you may want to be more cautious because if something happens you’ll have less time to recover before you retire.
Investments are broken up into three timeframes. When you need your money will help determine what types of investments are suitable for you:
- Short term investments: 1-3 years
- Medium term investments: 4-6 years
- Long term investments: 7 or more years
Once you have any idea of how much you’re willing to invest, what your risk appetite is and also how long you’re looking to invest for, you can assess where the best place may be to place your money.