Investment is basically to put your money in financial instruments to make them work for you, be it putting your savings into stocks, into fixed deposits, funds etc. Note that just leaving your money in a savings account would not do much for your money.
Most people that have no clue about the various financial instruments are always worried about one thing which is basically the risk involved or in layman's term -> "Losing your money". Thus, we would need to reduce our risks to maximise returns.
First of all, the investor needs to ask himself/herself if he/she has the time required to do research as after all, if you are planning to go into stocks, you would need to study the fundamentals of the company. I do not advocate contra as that is more like short term punts rather than long term investment. If you do not have the time, then it would be better if you invest in funds instead as the fund manager would make decisions on what equities to buy, and in addition, it also reduces the amount of risks you are exposed to.
Secondly, what kind of an investor are you? We have to look at the kind of returns you need like 20% of the sum of money put in and the duration of time you can put your money in. Normally, I would set the duration as a minimum of a year although in actual fact, most mid term duration is regarded as 2-3 years. Most funds will return positive returns if you leave it alone long enough for like 10 years so that it is almost like guaranteed capital protection.
An investor would need to understand that it is impossible to earn more than 10% returns in a year without any risks involved. However, the longer the time period, the less risk of losing your money there is. Obviously you still need to have a general knowledge of what's driving the global economy or what's hot. If you would like a high return, then when the fund is volatile and manages to wipe out 20% of your capital, would you be worried and sell off the fund immediately? Risk aversion also plays a huge factor of whether you would maximise any returns.
Thus for a novice investor, the returns, the time and the risk aversion determines what sort of investor you are. If any bankers or agents approach you and just recommend you any funds without determining what sort of investor you are, you can be sure that the agent is just thinking of his/her commission rather than your best interests. Obviously some of you might not be sure of where and what to invest in but as a safe gauge, the more conservative you are, the more your money is in bonds and money market. The more aggressive you are, the more your money is in equities. Your risk profile is always frequently changing, thus, any banker who did not do any updates on you is just not doing their job.
In my next post, I would discuss on how to determine what type of investor you are based on just 3 factors, namely risk, time and returns and recommend the types of portfolios that might be good for you.
