Investing Basics – The 4 Pillars of Investing

Investing is never a stagnate path. It is always changing as our needs and circumstances change.

How we choose our investing options is very much dependent on our big picture vision of what we want in terms of our financial and personal goals. If we can define our target outcome clearly, then we can formulate our investing strategy and take the right options to get us there. This will ensure a much better chance of achieving our target, compared to the haphazard way of grabbing whatever “hot” that comes our way.

Our big picture vision can be defined by four considerations – Liquidity Needs, Goals and Objectives, Time Horizon and Risk Profile.

Liquidity Needs

Liquidity means the ability to convert an asset to cash quickly. You want to keep an amount of cash or liquid asset (which you can quickly convert into cash) for daily or short-term needs, as well as for emergencies. You don’t want to tie up all your cash in non-liquid investments because you’ll be in a fix if there is an emergency and you need the cash which you can’t withdraw.

Goals and Objectives

You also need to examine what are your goals and objectives for investing. Do you have a specific goal in mind, such as a house, or retirement? Be specific in defining your goal. It’s not enough to say “I want to invest to have enough money for retirement”. How much is enough? $50,000? $100,000? Having a clear and specific quantifiable goal will help you to pin point the type of investment instruments you are going to use.

Time Horizon

How much time are you allowing your investments to grow to reach your goal? How long are you willing to wait to see your returns? 5 years? 10 years? 20 years? Perhaps you plan to get married and buy a house in 5 years’ time. Or maybe you are investing for your retirement in 20 years’ time. The time period you allow your investments to grow will determine the type of investment options you take, because of the different risks involved and the initial investment sum required.

Risk Profile

What kind of risk are you able to tolerate? Can you sleep at night knowing that you have put your money in an instrument which will give you high returns but with a high probability of losing it all? Or can you only have mental peace when you know you have put your money where there is very little risk of losing but low rate of return?

Does this mean that investing is risky? Investing is risky when we do not have the proper education and skills. What we want to achieve here is to raise our level of competency as an investor in knowledge and skill, so that we can minimise the risk and achieve high returns with each dollar we invest.

Putting the four pillars together

These four considerations are essential to finding the types of investments we want to use from the long list of available markets and paths out there today. Addressing these four areas makes the path fairly obvious.

Source by Kai Lee

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