Everyone reaches a point in their lives where they realise that investing is the right thing to do; unfortunately, it is seen as an alien concept that is only available for old people, professionals or the super wealthy, leaving a lot of people asking the question where to start.
The first step in investing is calculating your risk profile, this article provides you with the two most important questions you need to ask yourself to be sure you make the right decisions when it comes to your hard earned cash and investments:
What is your objective? (What do you want your money to do?)
What is your time horizon? (How long can you invest your money for)
The first question’s answer generally falls into two categories based on where you are in your life and dictates your risk profile. Earlier in your life you want to maximise your wealth, investing aggressively for retirement one day, your dream home or even that trip around the world. Later on, when you retire and start drawing an income from your investment, you invest more conservatively to avoid severe market downswings and protect your capital.
Secondly, you need to look at how long you can let your money grow before you will need to tap into your nest egg. If, for example, you’re investing for your retirement that is more than 10 years away, you invest more aggressively in things like shares riding the market up- and down cycles. Whereas needing the money in a few months’ time you require more stability where money in the bank becomes a better option.
Once you’ve answered these two questions and know what your risk profile is; you can start looking at investment options / vehicles that meet your objective(s) within your time horizon.