Developing an Investment Plan:
In
order to invest wisely, you need to have a suitable investment plan
that will ensure the appropriate amount of growth for you. Your
investments will also need to be safe and easy to manage.
The first step in developing an investment plan is to identify what type of an investor you are. Investor types are often determined by their stages in life. Here is a guide:
The first step in developing an investment plan is to identify what type of an investor you are. Investor types are often determined by their stages in life. Here is a guide:
- Single person under 40
years old. Focus: Long-term investments, medium to high risk.
Emphasis: capital gain, compound growth.
- Two-income married
couple, no children, aged 20 to 40 years. Focus: Long-term
investments, medium to high risk. Emphasis: capital gain, compound
growth.
- One-income family, young children, aged 20 to 40 years.
Focus: Long-term investments, low to medium risk. Emphasis: compound
growth.
- Single person, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
-
Married couple with adolescent or independent children, aged 40 to 60
years. Focus: Medium-term investments, medium risk. Emphasis: capital
gain, compound growth.
- All investors, aged 60 and over. Focus: Short to medium-term investments, low risk. Emphasis: Income.
The following are examples of investment portfolio mixes for the various types of investors.
Low Risk Investments:
Low
risk investments are predominately cash, fixed interest and
superannuation. This has the lowest risk of all investments but has
also the lowest return - in today's market, approximately 3% to 6% per
annum. Fixed interest includes cash, cash management trusts and bonds.
They return approximately 5% to 10% per annum, sometimes as high as 15%
if you invest in global bonds in good markets.
Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 10% per annum.
Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 10% per annum.
Medium Risk Investments:
Medium risk investments
include property and non-speculative shares. Diversified funds, which
invest in a range of asset groups, are also considered to have medium
risk profiles. Average returns from these types of investments will
range from 8% to 15% per annum.
I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium risk investments. Some can return up to 25% and more depending on the fund type and managers.
I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium risk investments. Some can return up to 25% and more depending on the fund type and managers.
High Risk Investments:
High
risk investments include all speculative shares, futures and any other
type of investment that is purely speculative by nature. Because with
these types of investments we are betting on whether the price will go
up, or sometimes down, I often classify this as a form of gambling.
Accordingly, the returns are unlimited but so is the ability to lose the
total money invested.
The basic rule for investing in highly speculative stock is to build in "sell-out" thresholds, three up and three down. For example, if you buy a stock at $20.00 per share, your sell-out thresholds might be:
The basic rule for investing in highly speculative stock is to build in "sell-out" thresholds, three up and three down. For example, if you buy a stock at $20.00 per share, your sell-out thresholds might be:
Sell out threshold 3 $30.00
Sell out threshold 2 $25.00
Sell out threshold 1 $22.50
Buy $20.00
Sell out threshold -1 $17.50
Sell-out threshold -2 $15.00
Sell-out threshold -3 $10.00
Each time your stock reaches one of the threshold levels, you sell a third of your stock.
If the stock starts to rise, you sell a third at $22.50 and then another third at $25.00 and so forth. If the stock starts to fall, you also sell a third at $17.50, then another third at $15.00 and the final third at $10.00. In this way, you will never lose all your money, however you have also put a cap on the total profit you will make on the investment. This I have found to be the best and safest method for investing in speculative shares. In 1987, my husband and I were saved from the severe losses of the Wall Street crash because we were well and truly out of the market by taking our profits beforehand. Like all systems, this strategy will onl.
If the stock starts to rise, you sell a third at $22.50 and then another third at $25.00 and so forth. If the stock starts to fall, you also sell a third at $17.50, then another third at $15.00 and the final third at $10.00. In this way, you will never lose all your money, however you have also put a cap on the total profit you will make on the investment. This I have found to be the best and safest method for investing in speculative shares. In 1987, my husband and I were saved from the severe losses of the Wall Street crash because we were well and truly out of the market by taking our profits beforehand. Like all systems, this strategy will onl.