Too often, we start with tactics rather than strategies when we think about investing. Should I buy this managed fund or that one? Should I choose real estate or shares?
The fact is, wealth-building needs to begin with defining your actual life goals, before you even think about what specific investment vehicles are selected. Goal-setting is highly dependent on the time-frame involved which means the type of investment you choose should be directly related to when you want the money to be available for its particular purpose.
Time-Frames and Investment Types
Suppose you are planning an awesome holiday to Europe in a year, and you want to save up several thousand dollars for it. Cash as an investment, like a high-interest online bank account, is a short-term vehicle, ideal for goals that are under 3 years away. This keeps your money fairly safe from loss over the short-term, but does not offer the opportunity for capital growth over the longer term.
A medium-term goal might be the deposit for a house that you want to buy in five years, for which you’ll likely need to accumulate tens of thousands of dollars. As you have a longer time-frame for this type of goal, you can tolerate taking on a little more risk with your money, and aim to generate capital gains as well as just interest. This time period allows you to ride out some of the ups and downs in the stock market, so shares could be an option.
Retirement savings is a long-term goal, probably measured in decades, and for such an investment you might consider both shares and real estate. Property is a very long-term purchase. For most people, in order to realize the gains from a property purchase, you must either sell it or borrow against it. This makes it less liquid than cash or shares so it’s definitely not ideal for short or medium term goals.
Goal-setting is key!
In addition to selecting the right investment for the right time-frame, it’s important to set goals that you really want so that you can measure your progress and also stay very motivated to stick to the plan. You can then assess whether or not your investment is performing the way you want, and make adjustments to the amount you save, or to your allocations, based on fact, rather than feeling.
Once you have a clear idea of when you need the money for each of your goals, then you are better prepared to choose an investment that will get you where you need to go.
Personally, I feel a great deal of satisfaction from seeing how I am making progress towards my goals. Whenever I make a contribution to an account, or check my balance, I know that I am moving towards what I really want for my life.
Please note this article is of a general nature and should be used for informational and educational interest purposes only. Please seek professional advice before making any decisions in relation to your own personal circumstances.