Selecting a method for investing
Unfortunately, the term “investment” is misused quite frequently today. For instance, when we discuss an investment plan to pay for a vacation or a new car, what we really mean is a savings plan. What exactly do we mean by investing, then?
Simply put, investing is the process of putting money into a vehicle for medium to long-term investment with the goal of increasing your capital, using your investment to generate income, or a combination of the two. An investment plan that is taken out today to pay for your children’s college expenses in ten or fifteen years is a good example.
The type of investment you use will depend on your attitude toward risk as well as the timeframe for your plan. There are many different investment types that can be used to create a plan. Stock market investing is a good illustration of this.
Due to the high volatility of the stock market, you can make money very quickly but also lose it very quickly. Investing in the stock market has produced many wealthy individuals, but it has also resulted in many people losing everything they owned.
Having said that, history demonstrates that the stock market has a long-term upward trend, so there is a good chance that you will make money if you invest for the long term. However, this must be viewed as a longer-term investment strategy with a high level of risk.
By distributing the risk among investors, such as through the use of managed funds like investment trusts and unit trusts, one can lower the risk associated with stock market investing. You can invest in a variety of unit-linked insurance policies today, and many insurance products are linked to the stock market as well. These types of investment vehicles carry what we might term a medium amount of risk, but they are less risky than investing directly in the stock market.
Investment tools with minimal or no risk are at the low end of the spectrum. Government and corporate bonds, money market funds, and a range of investment products from banks and building societies are some examples of these. ISAs, or individual savings accounts, are also included in this category of very low risk investments.
Building a plan typically involves matching your personal risk tolerance to a portfolio that itself strikes a good balance between high risk, high return investments and low risk, low return products. Most people today will have a mixed portfolio made up primarily of medium- and low-risk investment types.
