You wouldn’t set out on a journey if you didn’t know where you were going. It’s the same with investments. Spending some time thinking about your goals is one of the best decisions you can make.
Understanding your goals
Are you saving for the future? Need a regular income from your investment? Protecting your money for a rainy day? Each of these goals is best served by a different mix of investments. That’s why you need to know why you’re investing before you get started on how.
Long term vs short term
Experienced investors talk about investment time frames. This is about how long you plan to invest before you need to use your money. Below are some investment goal examples to help illustrate time frames:
Long term if you’re planning for retirement, you’ll have a longer investment time frame.
Medium term if you’re nearing retirement or building a rainy day fund, you might have a medium-term time frame.
Short term if you’re planning an overseas trip in a couple of years, or looking to celebrate a milestone birthday then this could be a short investment time frame.
Time makes a big difference
Time is an important factor in any investment. Since investments can go up and down, a longer investment time frame may mean that short-term dips have the chance to smooth out over time. Also, longer time frames may mean you can make the most of compounding returns to help grow your money.
If you’re investing over a shorter time frame you may well choose investments with less risk to better protect your money, short-term.
Income vs growth
Broadly speaking, investments fall into two main categories: income assets such as cash and fixed interest, and growth assets such as property and shares.
Investing for income: if you’d like to top up your income with interest from money you’ve saved, you’ll be looking for an investment that offers regular payments - while limiting the risk of losing your original investment. Investments in income assets are generally suited for short to medium-term goals.
Investing for growth: If your goal is to grow your investment for the future, you’ll be looking for growth. This is when your investment could potentially grow faster than inflation so you can buy more in the future than you could today. Investments in growth assets are generally suited for longer-term goals.
Thinking about liquidity
Liquidity is the term used to describe how easy it is to get your money out of an investment. This is important to consider if you think you’ll need access to your money.
Something like a savings account is highly liquid, because you can move your money in or out at any time. And something like an investment property has low liquidity because you’ll need to sell it before you can access your money.