Alternative Investment Strategies – 4 Important Factors In Deciding Your Investment

admin — Mon, 08 Mar 2010 15:40:32 +0000

Four factors should be considered when deciding on your alternative investment strategy. Here are a few thoughts on each.

What is your objective?

Consider the importance of stability of principal, predictability of income, and capital growth. These must be considered against the risk and reward potential of the three categories of investment alternatives. To have maximum stability of principal, you could invest in cash equivalents.

However, your income would be unpredictable due to the variation in short-term interest rates, and inflation could erode your purchasing power.

For higher predictability of income, you could invest in bonds. To do so would require you to take on interest rate risk in the event you need to dip into your savings before some bonds reached maturity. There would also be some exposure to loss of purchasing power through inflation although not as severe as with cash equivalent investments.

You could put your savings in stocks or a stock mutual fund. These choices have provided substantial growth of both income and capital over long periods of time. But, with wide, unpredictable price swings you would be exposed to market risk if you needed to draw from savings in excess of current dividends.

How long do you have?

Time gives you two advantages. If you have time, you can wait out swings in the stock market. And, if you have time, you can often settle for a lower rate of return because the effects of compounding will work more to your favor. Therefore, the time you have before you need to spend your savings and the flexibility, if any, you have on withdrawing money will point you toward particular classes of investments.

What is your risk tolerance?

Investors can be labeled as either conservative, moderate, or aggressive depending on the amount of risk they can comfortably handle. The rule: Don’t take on more risk than you can sleep with. Lying awake nights worrying about your savings is no way to either anticipate or enjoy your retirement.

What are your financial circumstances?

If you have ample savings to cover your needs, you may be able to take additional risk and not substantially affect your financial status. However, if you have limited resources, it might be better to concentrate on less risky investments in order to preserve what you have.

What is Your Acceptable Level of Risk in Investment?

admin — Fri, 17 Apr 2009 11:09:19 +0000

Your level of risk tolerance is the most fundamental thing in choosing the right investments for you. Before anything else, it must be understood that investing are like other things in the world: there should be positive and negative side to it. All investments follow 3 common principles. First, every investment takes with it a some of inherent risk. Second, risk and returns can not be separated such that the general principle of higher risk-higher return and lesser return, greater safety is widely accepted. Third, investing in anything for which one has no knowledge of is the kiss of death for the money invested.

With that being said, questions like what kind of risk tolerance investors are you are much dependent on many factors. These factors range from the personally acceptable risk threshold to the professionally proven investment risks.

Acceptable Risk Threshold

In risk management investment, risk is a matter of personal preferences. What is extremely risky for a new entrepreneur will be highly acceptable to the established entrepreneur simply because the personal circumstances with which risk is perceived are different between them?

So, when someone asking you question like what is your acceptable level of risk in investment in the quest to become a millionaire, there are four basic investment goals that will determine the acceptable level of risk to the individual:

- Income: Investments are purchased for the potential passive income that will come regularly. The principal can either be diminished or increased in the process, which is good either way.

- Growth: For this factor long-term appreciation in the market value is sought much more than principal safe and regular passive income flow.

- Speculation: For individuals with high tolerance for losses, speculation leaves for either higher and faster returns or quicker but larger losses.

- Safety: There is minimum risk of loss such that the principal can be returned almost full. This is very conservative albeit very safe; this is suitable for person with low risk profile.

When making investments decisions, individuals will do well to define the category of investors to which they belong to. By doing such things, proper risk-taking measures like gathering information about the desired investments and balancing the risks and return based on the information can be performed.

Likewise, it pays to plan the exit strategy before actually having the investment. Like mentioned previously, by nature investments have the risk of success and failure, which basically means that there must be a safety net when the latter happens!

High-Risk Schemes and Scams
Before you dive into investing, make yourself well informed about the situation, it also pays to do research on the various scams and schemes that will make questions like what are the risky factors or it is completely superfluous. After all, these investment schemes have been the end of the road for some newbie investors like you!

You may heard of Madoff with his Ponzi schemes investment, pyramid schemes (think of multi-level marketing online companies) and boiler rooms (it is the method being used by telemarketers to get your money to join them).

Nevertheless, the most important thing you can do to protect money invested in anything is to know yourself. Remember that investments are meant to make you relatively happy, now and in the future. Don’t forget what Warren Buffet words of wisdom in investing, if you are not comfortable carrying on to something for 10 minutes, you will not be comfortable sticking to it for the next 10 years.