When equity markets go up every day, people usually get attracted with euphoria and at times even end up investing their money in anticipation of quick gains. However, by doing this, people generally end up having losses than gains. This in-turn destroys their confidence in asset classes such as stocks.
We need to understand each asset class Risk Level, Downside Probability, and Return Potential with a minimum time frame to achieve such kinds of returns. Asset classes such as equity do not guarantee returns or the capital you are investing but on an average historically, equities have delivered above average returns and were able to beat the inflation by descent margins in the long run.
Considering the above, one should divide their existing money and also their monthly or annual future income in different categories such as those given below:
- Funds for basic expenses
- Funds for luxury expenses
- Liquid funds/emergency funds requirement
- Amount of money on which you can’t take any risk (Risk of losing that capital)
- Amount of money on which you can take some amount of risk
- Amount of money on which you can take higher risk to generate higher returns
- Amount of money which you may not require for say 3 or 5 or 10 years.
The above mentioned classification will help you identify the percentage of money you can invest in asset class say “A” and/or asset class “B” with predefined minimum investment horizon.
While you may earn money to spend, people who first invest their earnings and then plan to spend have survived the difficult times.
We advice that after providing for your basic needs, one should always strive to invest adequate money to keep pace with various factors such as Inflation or potential downturn in markets or income.
It is advisable to consult financial planners such as Investmentz.com to get your ideal asset allocation, which have more focus on comprehensive financial planning.
We hope that the above Five W’s of Investment will answer most of your investment queries.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.