With the appreciation of the peso against the dollar, you find yourself no longer satisfied with the interest you get on your savings account.Â You hear from different sources that now is the best time to invest in the Philippines.Â But before you jump head first into investing, what is the first thing you need to know about investing?Â
The first thing you need to know is yourself.
Know your investment objective.
Why are you investing?Â Is it so you can buy a house? a car? travel the world?Â retire comfortably?Â You need to know first know how much is enough for you?Â For example, if you answered retire comfortably,Â define comfortable for you.Â A comfortable lifestyle may mean different things to different people.
Your risk appetite.
How much risk are you willing to take or better yet how much risk can you really afford?Â Different investing instruments have different risk levels.Â Typically, returns are proportional to the risk associated with the instrument.Â i.e. Higher risks means potentially better returns (and potentially bigger losses).
In stock investing for exampleÂ fixed incomeÂ instruments, such as bonds and money marketsÂ have a relatively lower risk but the returns are also smaller compared to what you can get from investing in equities or growth companies.Â In stock investing, price volatility is usually an indication of the risk factor.Â If the price of stock swings up and down, there’s a chance that you may have bought at peak price and stand losing when the price suddenly drops.Â Â
How long can you wait?
When you assess your risk appetite, consider how much time you have to recoup in case of losses.Â Usually, older people are advised to go for lower risk investments because they don’t have as many years on their side to recover from major losses, or say a recession that lasts 5-10 years.Â On the other hand, younger people have more time to ride out the volatility and therefore can take on more risk.
How long can you delay gratification?Â Investing in mutual funds usually require a longer time horizon because it allows you to ride out the dips in the market cycle.Â Also, the power of compounding is best utilized when you have a long investment period.Â If you can’t wait that long then flipping properties might be better for you, but it also entails a whole different set of risks.
The best way to reduce risk isÂ to do your research.Â As Warren Buffet said, “Risk comes from not knowing what you’re doing.”Â The more you knowÂ aboutÂ your investment the less risk you take.Â Â
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