By: Ashley Ma
The importance of understanding your goals and attitudes towards savings and investing can never be overstated. Three basic questions can frame this assessment – how much do you have to invest, how long are you investing for, and what type of risk taker are you?
How much you have to invest should, of course, exclude your emergency fund, and if you’re carrying credit-card debt you should pay down your debts before investing your money. While first-time investors are often concerned that they simply don’t have enough money to invest, it is not uncommon to start with small amounts (perhaps $1,000) – the key is to consider the cost of commissions on any trades, and factor that expense into calculating your expected return.
Time horizons for investing are typically divided as follows; a longer time horizon allows you to absorb greater risk.
- Five years or more: long-term investor
- Two to five years: intermediate-term investor
- One to two years: short-term Investor
To assessing your risk profile, consider the worst-case scenario for your finances, and how big a loss you can withstand on one year’s investment. Most guidance frames typical risk profiles as follows:
- Up to 5% ($500 on a $10,000 investment): low-risk investor
- Up to 15% ($1,500 on a $10,000 investment): moderate-risk investor
- Up to 25% ($2,500 on a $10,000 investment): high-risk investor
The intersection of these characteristics will help define your approach to your portfolio.