Your investment risk profile will help you work out the type of investment you should consider.
There are four factors in your investment profile:
1. Duration – How long do you want to invest for?
2. Returns – Do you want income or growth?
3. Liquidity – Do you need to get to your money easily?
4. Risk – Understanding the nature of risk involved in different forms of investment and taking account of your views on risk.
12% return, can you really afford it?
There’s little point investing in something offering returns of 12% or more if you end up losing some or all of your money.
It might be that you have a couple of different investment goals. You might be saving for an overseas holiday, and saving for your retirement at the same time. You’d have separate investment profiles to match each goal, and the best investments for you will be different in each case.
1. Duration of investments
Duration means how long you want to invest for.
Short term – 1 to 3 years
Medium term – 3 to 7 years
Long term – over 7 years
Money you are saving to go overseas in two years time is a short term investment.
So you need to make sure you’ll be able to get it when you need it. Money you are putting away for your retirement can be a long term investment. Over a longer period of time you’ll be more interested in capital growth.
It’s common to have different investments of different durations.
2. Investment Returns – Income or growth?
To work out the type of returns that will suit you, ask yourself if you’re more interested in income or growth.
a. Do you want to use the money your investment earns as income to live off during the duration of the investment?
b. Do you want to reinvest it with the original lump sum, and grow your lump sum as much as possible?
If you need short term income from your investment, it’s probably best to put your money where you can guarantee how much money it will earn – such as a bank deposit paying a fixed amount of interest for a set period.
If, on the other hand, you don’t need the income in the short term and you want to grow your lump sum as much as possible, you could consider investments that don’t guarantee the return from year to year, such as shares.