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Usually, investments aim to grow your existing assets, but that growth should be aiming towards something. Example end goals for investments include:
Deciding what it is that you are aiming for will allow you to calculate the time frame of your investment.
Example:
* note - past performance is not indicative of future performance
This is the period over which you invest. Investments should suit the time frame of your goals. When is it that you’ll want to access the money? For example, don’t try funding this year's Christmas vacation with an investment in $DOGE.
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Ultimately, investing is a long-term game, so don’t let short-term volatility sway your mood on investing. Remember the saying - it's all about time in the market, not timing the market. It can be nearly impossible to know the best time to invest, other than in hindsight!
For example, let’s say you had invested in an S&P 500 index fund on 1st Jan 2018:
(S&P 500 = a stock market index made up of 500 of America’s largest companies with publicly available shares 🇺🇸)
S&P 500 10 year average returns (2010-2020) = 13.9%*
*Compounded Annual Growth Rate
Hindsight is a wonderful thing! Although it would have been frustrating to have begun investing in the S&P 500 during 2018, the big picture is what you get over the long term.
When looking at investing over a period, dollar-cost averaging is a sensible strategy.
Dollar-Cost Averaging
In Dollar-cost averaging, you split your purchase into separate periodic transactions. You will commit a fixed amount of money to invest in a particular asset on a regular schedule. This aims to benefit from price volatility when you buy and takes away the human element of trying to time the market (on top of the already difficult decision on what to buy)!
If you have short-term horizons, it’s quite likely that you’ll be relying on extreme levels of volatility (hopefully in your favour) to provide returns, as other forms of investment income, such as interest or dividend payments, will struggle to produce any sort of substantial quick returns. What’s more, the stage of the economic cycle, or a company’s performance, is unlikely to drastically change in the short term. If you’re betting on volatility in your favour, remember that volatility goes both ways - just ask anybody who thought Bitcoin was quick easy money in December 2022, priced at $60,000… (Bitcoin went on to hit lows of $20,000 six months later).
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It’s important to recognise the role that investments play in providing passive income, not just while people are of working age, but also as a form of income during retirement. Many of those investors don’t care about the market prices of their investments at all, as long as they provide them with the income they want. Maybe they have a point!
Once you have read through the previous parts of this topic and (hopefully) been able to identify your risk preference, you can use the investment risk pyramid to identify a diverse range of assets for your portfolio.
INVESTING CONSIDERATIONS - RETURN. COMPLETED. ✅
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