There are a wide range of investment opportunities available, so it’s important to understand what your objectives are, to make sure that you pick suitable options. Typical financial objectives include: growing your savings for the future, protecting the value of your savings against inflation or generating an income.
It is common for people to have more than one objective with their investments, so it is important to get the right balance between which objectives should be prioritised more than others. This balance generally changes as people age, with certain objectives becoming more important. For example, older people tend to care more about generating an income and less about growing their savings.
The objectives that you have will related with particular types of investment. To give a few examples, the objective of growing your savings is generally linked with investing in stocks, generating an income tends to be linked with certain stocks and bonds, while protecting your savings against inflation is linked with investments in gold, bonds or cash investments. We will cover this in more detail as the course progresses.
Each of the three investment objectives discussed so far requires different attitudes toward risk.
‘Growing your savings’ is considered to be the riskiest objective, as investors should invest in stocks in order to achieve growth. Stocks are risky as they are the most unpredictable, swinging from one price to another over the short term. With that said, it is important to note that most stocks increase steadily over time. This may not suit a lot of people, who may instead prefer a more stable investment experience. They may be unable to handle the ups and downs of investing in stocks.
The risk associated with “Generating an income” depends on the level of income that an investor wants to achieve. The higher the income that they want to achieve in relation to the money they have, the riskier it is.
When it comes to ‘protecting the value of your savings against inflation’, the risk is a lot more manageable. Most of the time, inflation is fairly easy to keep up with and requires investments into assets that offer a low return (usually around 2%). For this reason, most individuals are likely to be comfortable with investing for this objective (in terms of their risk tolerance).
As mentioned, the objectives that an individual prioritises is commonly down to age. The reason for this is people face different challenges at different stages of their lives. Younger people are just getting started in life and are therefore more able to take greater risks to improve their financial position. For that reason, investing to grow their savings may be the most appropriate objective to focus on.
With that said, it depends on what the young person is focused on in life and how long they intend to invest for. For instance, if a young person wants to invest for a fixed 5 year period to pay for their wedding, then investing for income may be better. This is because growth is less predictable. It is not certain that it will be a good time for them to withdraw their funds 5 years later. The market may have temporarily fallen.
As stated, older people may prioritise generating income. This is especially true of people that have retired, as those individuals sometimes need to top up their pension income. At the same time, an older person may want to grow parts of their savings for their younger relatives (i.e. grandchildren). So, growing their savings over the long term may be suitable, as they do not need that money in the short term.
So, think about your situation and what your objectives are before making any investments.
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