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Choosing Investments FAQs
What do I need to think about when choosing investments?
If your idea of investing involves squinting at the financial pages like they’re coded messages from the future, waiting for a hot stock tip to jump out and make you rich overnight — forget it.
While the image that’s usually portrayed of the successful investor (someone who spends their days scanning ticker symbols on a screen and screaming “buy buy!”) makes for great drama, in actual fact, it makes for terrible investing.
In reality, picking smart investments has far less to do with predicting the next big thing and far more to do with understanding yourself — your goals, your time horizon, and your risk tolerance, and then building a plan that grows steadily over time.
No tarot cards or crystal balls required!
What’s the difference between a trader and an investor?
Go back to that image above – the guy screaming “buy buy!” and spending his days glued to a screen. That’s a trader.
And while the terms ‘trading’ and ‘investing’ are often used interchangeably, they are actually very different activities.
A trader is someone who is interested in making short-term gains, often from movements in the markets made during the course of one day.
An investor thinks far more long-term. Investors typically ‘buy and hold’ stocks, bonds or funds for a longer period of time, preferring to wait out fluctuations in the market to gain from an upward trend that may take many years to be realised.
As a rule of thumb, investors should be happy to leave their money in the markets for at least five years. Traders may want to put their money in – and pull it back out again – within very short time periods.
What do you need to consider when choosing an investment?
Before you put a single penny into the market, you need to identify why you’re investing in the first place.
- Is it to retire comfortably in 30 years?
- Buy your first home in 5 years?
- Build a fund to pay for your children’s future university costs?
This is important because your goals will shape everything from what you invest in to how much risk you should take.
Next, think about your time horizon – in other words, how long you can leave your money invested before you need it. The longer the timeline, the more potential market ups and downs you can afford to ride out, which opens up assets with a higher risk rating. If your goals are relatively short-term, you’ll probably want to stick to safer options that are typically shielded from extreme market volatility.
And then there’s risk tolerance – that’s a fancy way of asking how much sleep you’ll lose if your investments drop in value. Some people are entirely comfortable with the idea of their investments going up and down over time, others panic sell at the first dip. Be honest with yourself here: it’s better to build a steady plan that you can stick to rather than chase big returns that keep you awake at night.
Getting these three things right – your goals, your timeline, and your risk tolerance — is like setting the GPS before a road trip. Without them, you’re just guessing where you’re going.
