Matching an investment with needs
When making an investment decision, I believe the most crucial consideration is; what am I trying to achieve with this investment – what is the end goal? As I say regularly, the aim of the game isn’t to make as much money as possible, it is to make sure we achieve our goals.
It is also important to look at how our lives are likely to change over the length of the investment and determine if this might affect the appropriateness of the investment choice.
The length of time of an investment greatly affects the exposure to growth; short-term investments should have a low exposure to growth. The logic being, if an investment with a short-term investment horizon experiences a bad year (which is inevitable), it won’t have the chance to recover with subsequent, above average years.
Therefore, it stands to reason, if you are saving for something that is in the short to medium term, for example a holiday or the Children’s education, you would look for an investment that is defensive in nature. A cash based investment might be appropriate if you are looking at a 12 month time frame, where a defensive managed fund might be the way to go if it is a 3 -5 year time horizon.
In Australia, we love property, and investment properties are a wonderful way to build wealth for the long-term. They provide capital growth, we are able to gear our investments with low interest rates and most people are comfortable with an investment property.
Properties are very suitable for people with long investment horizons, who are looking to build wealth for goals at least 10 years into the future.
Properties also have what we call stepped growth. This refers to the fact that the market often sits still or as low growth for a number of years, then dramatically surging before flattening with the process repeating. If you hold a property for a number of years you will benefit from a number of these surges. A short-term holding may encompass a period of only low or no growth. High entry and exit costs of property also lends itself to long-term investments.
Before we enter a long-term investment, especially one that requires an ongoing commitment, we should look at our own situation. Will my income or expenses change greatly? If so, will I still be able to commit to this investment? Starting a family for instance, can throw a spanner in the works of an investment strategy.
As we get to retirement, we should move towards high income bearing investments that are liquid. Our investments are now our income source, so we should structure them to best achieve this goal.
Different investments have different strengths and weaknesses. Matching our investments to what we are trying to accomplish will best achieve our goals – this is the aim of the game.