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Whether you're new to investments or you've been active in the markets for years, it's never too late (or early) to get your head around the different types of investment opportunities available. As we know, one size never fits all, so in this piece we're going to run you through the options out there to help you determine which category is best suited to your needs.
The 3 tiers of investments
First and foremost, when diving into the world of investing one must first determine their risk tolerance. Understanding how much risk you are willing to engage in will help you establish which investment avenue to go down. The three options are:
1. Low-risk
These types of investors are not looking to take risks with their capital. The primary goal is to preserve the initial investment despite the opportunity to gain returns. This is a great start for new investors as the risk is minimal while they learn the ropes.
A great investment option within this risk category is a money market fund. The funds are typically managed by professional licensed fund managers, and involve bank deposits, commercial papers and treasury bills. While the risk is low, the potential for returns is moderate and the investment is liquid, meaning that the investor typically has access to the funds at any time.
2. Medium-risk
Providing an option for the more confident investor, medium-risk investments incorporate moderate risks but have measures in place to stop any high losses. This strategy is often made up of low-risk and high-risk investments, ensuring a balance between the two components.
Medium-risk options include a mix of mutual funds and dollar funds, which will invest in medium-risk stocks, bonds and treasury bills. The risk of losing capital is therefore lower than with high-risk investments while your potential for returns are higher than low-risk investment options.
3. High-risk
This category is for the investors with an appetite for risk. They're comfortable with losing their invested capital in the pursuit of higher gains. A huge note here is that Ponzi schemes are never good investments. Rather stick to professionally managed investment funds that are catered to those with a high-risk threshold.
These might include equity mutual funds that invest in stocks of vetted companies with large public listings. These are best catered to long-term timelines, as volatility might hinder the returns in a shorter space of time. High-risk investments have the potential to bring about higher returns, however, this is never a guarantee.
How to distinguish what type of investor you are
While a professional financial advisor can do this for you, we've created a three step, simple way to determine whether you fit into the conservative investor (low-risk), moderate investor (medium-risk) or aggressive investor (high-risk) category. Consider these three factors below:
- What is your age?
If you're younger, there are more years ahead of you to recover from a bad investment. As a result, each passing birthday slightly lowers your risk tolerance.
- What is your marital status?
As a general rule of thumb being married incurs more expenses and allows for less risk-taking when compared to a single person with no one else to be responsible for. With fewer financial responsibilities comes a high opportunity for risk-taking.
- What is your net worth?
Last but not least, your net worth will also impact your appetite for risk. The more money you have, the more you can risk to make that money grow (and the bigger the cushion if an investment does go south).
In conclusion
It's important to remember that one investor type is not better than another, rather, it is about what is best suited to your needs and requirements. The longer you leave these investments the higher the returns, so be sure to have a solid savings account built up prior to investing to ensure that should something go wrong you have alternative sources of funds to support that. Liquidating your investment early might lead to losses and most certainly lost opportunity.
Please consult a financial advisor should you want more information.
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