Setting investment goals is an important first step on your journey towards financial independence. As with most things in life, you’re more likely to achieve success if you set clear goals for yourself. It’s no different with investing. That’s why setting investment goals is such an important step on your financial.
When setting your investment goals, you need to consider the following questions.
- Why are you investing? Being specific will make your goals real and help you understand what you need to do to achieve them.
- What is your investment timeframe? Your age and your investment timeframe will have a big impact on your investment choices.
- How much risk are you comfortable with? The more lofty your goals, the greater the risk you will need to take to achieve them. Depending on what level of risk you’re prepared to accept, you may need to adjust your goals.
Understanding the relationship between risk and return will help you choose the right investments. Generally speaking, investments that have greater investment upside also have greater potential risk.
A bank account is a great example of a low-risk investment. It’s guaranteed by the government so there is almost no chance that you will lose your investment. You could increase your potential return by investing in a term deposit instead of a bank account, however that will increase the level of risk slightly. Shares are a classic example of a high risk, high return investment.
Fortunately there are ways to reduce risk.
- Give it time
Investments with high potential return can be volatile in the short term but tend to be more consistent over longer time periods.
Diversification is vital
Diversification involves spreading your investments across a number of asset classes (shares, property, fixed interest, cash), a number of sectors within this website, those asset classes and a number of quality assets within those sectors.
An easy and effective way to diversify your portfolio by accessing a number of specialist fund managers in a single fund.
A key benefit of multi-manager funds is the level of diversification they provide.
It is unlikely that one fund manager will outperform the market in all market conditions. Equally, one fund manager might have expertise in one asset sector, such as Australian shares, while another might be a specialist in international shares.
Diversifying across fund managers can help reduce risk and volatility. This means returns from multi-manager funds are likely to be smoother over the long term.