Investing 101

With a bit of knowledge, anyone can start investing and building their wealth. In this article, we discuss the different types of investment vehicles, asset allocation, time horizons and diversification, all of which are crucial for beginners to understand.

TYPES OF INVESTMENT VEHICLES

There are many different investment vehicles, each with its own set of risks and rewards. Here are a few of the most common types:

1. Stocks: Stocks represent ownership in a company and can provide growth and income through dividends. However, they come with a higher level of risk.
2. Bonds: Bonds are debt securities issued by companies, governments, or other organisations. They provide income through interest payments and are generally considered less risky than stocks.
3. Mutual funds: Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, and other assets.
4. Exchange-traded funds (ETFs): ETFs are similar to mutual funds but trade like stocks on an exchange.
5. Real estate: Real estate can provide income through rent and appreciation in value over time.

ASSET ALLOCATION

Asset allocation refers to the process of dividing your investment portfolio among different asset classes. The goal is to create a portfolio that meets your long-term financial goals while managing risk.

There are three main asset classes: stocks, bonds, and cash. Each asset class has a level of risk and potential reward. The asset allocation that works best for you at any given point in your life will depend on your time horizon and ability to tolerate risk. Generally, stocks have the highest potential reward but also the highest risk, while bonds have lower potential reward but lower risk. Cash and cash equivalents – such as savings deposits, certificates of deposit, treasury bills, money market deposit accounts, and money market funds – are the safest investments, but offer the lowest return of the three major asset categories.

The key to asset allocation is finding the right balance between these three asset classes. This will depend on your goals, risk tolerance, and time horizon.

TIME HORIZON

The length of time you plan to hold an investment before selling it is referred to as the investment time horizon. This can vary depending on your financial goals, risk tolerance and investment strategy. Short-term investments are typically held for less than a year, while long-term investments are held for several years or even decades. Carefully consider your investment time horizon when making investment decisions to ensure that your investment strategy aligns with your goals and objectives.

DIVERSIFICATION

Diversification is the process of spreading your investments across different asset classes, sectors, and geographic regions. The goal of diversification is to reduce risk and maximise returns over the long term.

For example, if you only invest in one stock, you are taking on a high level of risk. If that stock performs poorly, you could lose a significant amount of money. However, if you invest in a diversified portfolio of stocks, bonds, and other assets, the risk is spread out, and a single stock performing poorly will have less of an impact on your overall portfolio.

THE BOTTOM LINE

Knowing when you are ready to start investing and a general understanding of the different investment vehicles available, asset allocation, time horizons and diversification, will help you get started on your investment strategy.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.