Key Factors to Consider when Investing
When choosing an investment it is important to consider:
1. TIME HORIZON. The length of time you plan to invest the money before you want to use it.
Why? Our goal is to minimize risk and maximize expected return. Different types of investments - like stocks, bonds and money market funds, behave differently and may be more suited to a particular time horizon.
Money market funds, for example, earning 2% less than the inflation rate are unlikely to fund retirement needs but may a good option for a vacation in 2 years.
Short-term: up to 3 years.
Medium-term: 3-9 years
2. RISK TOLERANCE. How much fluctuation in price or value of your investment are you able to accept for increased return. The volatility of investments vary enormously. Bitcoin is extremely volatile with intra-day price moves of 20%. Consumer staples (think toilet paper) is historically the least volatile stock index.
Investment involves risk. Risk and Return are directly related - as one goes up, the other goes up. The goal is to invest with at least the minimum risk required to achieve the return you need to fund your goal.
A too low risk (conservative) portfolio may not deliver the desired return. A too high risk (aggressive) portfolio may cause intolerable and unnecessary anxiety or prompt someone to sell at an inopportune time. It is critical to find the right risk-reward balance for you and your goals.
The price may go up and down several times during the time you hold your investment. It is important to make buy and sell decisions based on analytical evaluation of accurate information and not on emotions or media sensationalism.
3. WHEN ARE YOU GOING TO SELL
When initiate an investment you should have an idea of the price at which you want to take profit, as well as the price at which you no longer believe in the investment.
TAKE-PROFIT: The price at which you want to take profit - lock in an increase in the value of your investment. For example, if you purchase a stock at $100 and expect the price to increase to $200, you may wish to take (or lock in) profit at $200 or $180.
STOP-LOSS: Not every investment will be profitable, and to avoid emotions driving investment decisions it is important to know at what price you no longer believe in the value of the investment. For example, if you purchase a stock at $100 and expect it to go to $200 but it declines (which is a characteristic of stocks which go up and down), you should know in advance the range within which you are willing to hold the investment and the price at which you are no longer confident in the investment. A stop-loss is used to limit the loss on an investment.