Investment is about your future financial well-being not about machismo. Make the wrong investment decisions or for the wrong reasons and your wallet could feel the pain.
You need to be clear about three things:
- The level of risk you are willing to accept.
- The length of time you are prepared to invest.
- The investment return you expect to get.
First of all, you need to determine your risk tolerance level. Risk is the amount of volatility and uncertainty you're willing to accept from an investment in seeking your financial goals.
Generally, the higher the risk of an investment, the greater its potential returns. The lower the risk, the less likely it is for that investment to generate a higher rate of return.
Ask yourself, "How comfortable will I be watching my investment go up and down in value?" The more comfortable you are with so-called price volatility, the greater the risk you are probably willing to assume.
Your next step is to be clear about your time horizon - how long you are willing to invest. Generally, the more time, the more risk you can afford to assume. The longer you are prepared to invest, the more time you will have to ride out the market's ups and downs in pursuit of your financial goals.
Finally, you need to take account of the return you are looking to get. Once you know how much risk you are prepared to take and how long you are prepared to invest, you can focus on investments that will match those criteria and aim to generate the return you want.
There are lots of investors that you don't want to be, among them:
This investor gets a hot tip and plunges in. But that hot tip is based on third-hand rumour that rarely comes true.
The Sooth Heeder
Entrails and tea leaves are so 'Ancient World', now sooth heeders pay hundreds, if not thousands of pounds for tipsheets and complex computer models that churn out charts and forecasts, promising stellar returns. The people who get rich from these things are those who sell them not those who buy them.
The Knee Jerker
Investors of this type were strongly in evidence in the stock market over the summer of 2007. They act before they think, buying after the price has risen strongly and when it falls steeply, they sell. What they don't lose on the actual market, they'll endeavour to lose in trading costs!