Develop an investment strategy like a financial advisor
There are a number of key factors that a financial advisor will evaluate when putting together a suitable investment plan. Each of these factors should be appropriately matched to her own personal needs and goals. Below I have identified the main criteria that should form the basic components of any investment plan.
Time frame.
The time frame of an investment refers to the period of time you will need to tie up your money before the investment matures or provides the desired return.
Liquidity.
Liquidity implies the ease with which you can access your money. Typically, this would be measured as the time it takes to recover the physical cash in your possession.
Risk profile. The risk profile of an investment refers to how volatile the investment can be. This is usually measured by the standard deviation and will measure the potential for moves up and down. Your own risk profile relates to how comfortable you are with the potential for up and down movement in the value of your investment.
Diversity. Investing diversification involves having a range of different asset classes in your portfolio to spread your risk. The idea of having a diversified portfolio is to smooth out the investment journey by not having all of your investments exposed to one asset class.
Time frame:
Time frame and liquidity can be considered to go hand in hand. As mentioned above, liquidity can be described as the time it takes to get your hands on physical cash. The liquidity of an investment will largely depend on the time period and type of investment your money is in at the time. Therefore, by managing the time frame of your investment, you should be able to manage your liquidity needs.
In general, it can be said that the longer you invest your money, the higher the potential returns. This is due to the fact that if you invest for the long term, you can typically ride out market cycles, both good and bad, and effectively create a long-term average return. This principle is generally quite correct, however it is important to manage and monitor the investment over the term. This is particularly relevant as the time approaches when you need to access the money again, as you do not want to be exposed to a possible market crash before the expiration date. This can have the effect of eroding potential gains that were previously achieved. The other advantage of investing for the long term is that you can take advantage of the effects of compound interest. If we look at some simple calculations we can clearly see the power that compounding interest can have over the long term.
If we take €100 invested for 100 years at a simple interest rate of 6% per year, the total value after 100 years would be €700.
If we take the same €100 invested for 100 years with interest compounded at 6% per year, the value after 100 years would be €33,930.
You can see that the effects of compound interest are amazing and that is why many people refer to compound interest as the eighth wonder of the world. It also shows the potential benefits that come with long-term investing.
What are the key questions to ask yourself when looking at the time frame?
The first question you should ask yourself is; When will I need to access this money again in the future?
If you need access to your money in the short term, there is no point in having a long-term investment strategy. You need to plan for your short-term needs and strategize about it. When your investment time frame is short-term in nature, your investment options will be limited; However, that doesn’t mean you should be less careful when trying to maximize your returns.
Have you made provision for any known needs in the short or medium term?
If you know there will be a future event where you will need access to cash, again you should manage your investment time frame around that. It is vital that your money is not locked into an investment when the cash is needed to cover an upcoming cost. Having to break an investment can result in losses or penalties that could put you in a worse position than you may currently be.
Have you planned for any unforeseen events?
In all of our lives, there are unforeseen events and emergencies where we will need to access our cash on short notice. It is important that as part of any investment plan this is covered and a plan is built around this. This would normally be described as your emergency fund. All investment plans must take into account the possibility of an unforeseen event occurring in the short or medium term and, therefore, must anticipate for it.
How to manage the time frame of your investment
When analyzing your own investment time frame, you will need to identify your own needs in the short, medium and long term. Once this is done, you can begin to build a plan around these and maximize the growth potential for each part of your investment.
What are these needs?
short term:
Short-term needs will mainly be your daily needs. These needs can be described as your living expenses, such as food, electricity, heat, and other essentials that you will need to pay for on a regular basis. These daily needs are usually covered by your income. These funds will not form part of the investment strategy although, as mentioned in previous chapters, careful management of your income can generate funds for future investments.
Short/Medium Term:
In the short or medium term you will have known expenses that you will have to cover. Examples of these may be children’s education or the replacement of your car. You will also have unknown expenses that can occur on an ad-hoc basis and will need to be provided for as well. To meet these needs, the funds would normally be invested in cash deposit accounts at your bank over a deposit period of no more than nine months. Given the fact that these expenses can arise at any stage, a good solution may be to have a range of short-term deposit accounts with varying accessibility from one to nine months.
Long-term:
Long-term needs can really be categorized as true wealth building needs. Your long-term needs would normally consist of the need for financial stability and wealth in later life.
It is within the medium to long-term investments that you will hopefully achieve potentially higher growth rates while also taking advantage of the effects of compound interest.
Given the number of variable time frame constraints, it’s important that you manage them all so that you not only provide liquidity at the right time, but also maximize growth potential at every opportunity.
Managing this can be accomplished as part of a structured plan by using what we call “rolling maturities.”
What exactly does “mobile expiration” mean?
Put simply, rolling expirations means building an investment plan that will have regular and frequent expiration dates within the overall investment plan.
This means that when you have a fixed amount of money to invest; You don’t put everything into an investment with a future maturity date.
Rolling maturities consist of using multiple different investments with multiple different expiration dates.
This will mean that throughout the investment period there will be regular maturities of money. This allows you to reassess your needs at each interval. This is important as your needs and objectives are also likely to change regularly and regular maturities will allow you to adapt your investment plan to any changes.
What are the results of establishing a rolling maturity investment plan?
Rolling Maturities allows you to manage change on several different headers. These changes may be changes in your own circumstances, such as the birth of a new child or a career change. It can be changes in the global economy and markets in general. We have seen how this can change dramatically after the 2008 crash.
The fact is that we don’t know what will happen in the future, so your investment must adapt to any changes that may occur. Periodic reassessments and expirations allow you to tailor your investment strategy around these potential changes as they occur.
The key to managing the time frame is planning. it is complex. There are a large number of different investment possibilities with different expiration dates available to you. This involves sitting down with your financial advisor to put a plan in place, assess your goals, and strategize around them.