Before committing money to any sort of investment, it is vitally important to make an investment plan. In order to maximize your benefit from any investment, you must outline exactly what your goals are. This may seem like an obvious advice, but it’s surprising how many people don’t slow down and decide what their investment goals are and if what they are investing in is going to achieve those goals.
This article will provide you with information about a few basic elements to consider when making an investment plan.
The first thing you must decide in any good investment plan is how much money you are going to invest. Again, this sounds almost too obvious, but it can have a great effect on what types of investments you make. For example, if you have only $100 to start with, you are going to have a hard time investing in a large house and may be better off buying a Certificate of Deposit at a bank. Also part of this element is deciding if you are going to make regular contributions to your investment, or if you are going to plop down a single sum of money at the beginning and not add any more later. This may effect what you invest in, but more importantly it is just simply a good aspect of personal budgeting.
The second step is to determine how much risk are you willing to take with your money. You have to ask yourself how important it is to you to keep at least the starting amount of money you have. If you are younger, say in your twenties, and you are planning for retirement, you can take greater risks with your investment. This is simply because you have more time to recover if something goes badly. If you are saving for your child’s college education, and he or she is in high school now, you won’t want to take too many chances with your money. In that case, it’s more important to keep the initial investment safer, even at the expense of lower returns.
Once you’ve decided how much you have to invest and your risk level, the next step is to determine what time frame the investment is for. This goes along with risk tolerance, but not does not always parallel it exactly. Do you plan on putting the money away for a month, three months, a year, five years, or until retirement? This is an absolutely vital decision to make, as it will have a tremendous effect on what investment to make.
Good investments for a time frame of under a year include Money Markets and Certificates of Deposit. They don’t have high rates of return, but they are safe and easy to get your money out of after the time goal you set. You can invest in stocks and mutual funds for the short term, but you are incurring greater risk in doing so. Real estate and business ventures would not be good short term investments as the costs involved in purchasing property or a business would eat away at your profits in the short term.
If you are planning on keeping your money invested for a longer period of time, you have many more options. Stocks and mutual funds become more attractive, as the stock market tends to rise over time. Real estate can be a good investment if your time frame is over about five years.
The last aspect of making an establishing an investment goal is to determine exactly what you want your investment to do for you. In most cases, people want the value of the investment to go up. This is called capital appreciation. For example, if I buy 100 shares of a stock at $50 per share, my initial investment is worth $5000. If, a year later, each share is now worth $60, my total investment is now worth $6000 and I’ve incurred capital gains of $1000.
Some people, especially retirees, are looking not for capital gains, but to establish a regular monthly stream of income with their investment. When you are dealing in stock and bond investments that create cash every month, you need to look for investments that have a high yield. The Yield is the percent of your initial investment that is paid to you, typically each year.
The most important lesson to take from here is to plan before your invest. Know how much you have to invest, how much risk you can take, how long you need to invest for. Once you have these issues decided, you can begin to make decisions on how you are going to best make your money achieve your goals. Good luck!