Updated: April 7, 2022
There are hundreds of investments out there. But which one is the best? How do you choose the right investment for you?
When deciding where to invest, I normally use a goals-based strategy, which I also refer to as the matching principle.
Simply, low-risk investments for short-term goals, moderate-risk investments for medium-term goals, and high-risk investments for long-term goals.
For instance, if I’d like to invest my travel fund for next year, then I’ll put the money in a time deposit or money market fund. But if it’s for my retirement, then it’s definitely going to an equity fund or the stock market.
The HEROES Approach
On the other hand, a more detailed strategy of the matching principle is the HEROES approach, which I recently learned from AXA Philippines.
The framework considers six things to determine where an individual should invest: their investment Horizon, investing Experience, Risk appetite, investment Objectives, Expected returns, and the financial Situation of the investor.
Given this acronym, these are the six questions you should ask yourself when choosing an investment.
1. What is my investment horizon?
Your investment horizon is the length of time that you expect to keep your investment. In other words, how long are you planning to stay invested? When are you hoping to finally use the money?
Investments typically have holding periods, or a length of time when you cannot take out your money. So for instance, if you plan to use your money next year, then investing in a three-year corporate bond is not an option.
You are not investing for investing’s sake. You will eventually want to spend your money, and the question is when.
2. How much is your investing experience?
Economies and markets are unpredictable. Lack of investing experience can easily make you fearful and anxious when things go bad. So it’s important to choose investments that match your level of experience.
If you’re new to investing, then avoid complex instruments such as derivatives and cryptocurrencies. Instead, go for beginner-friendly investments first, such as pooled funds.
Later, as you gain more experience and learn about different securities, you can eventually put money in savvier investments.
3. How much is your risk appetite?
Risk appetite refers to the amount of risk you’re willing to accept.
Are you prepared to lose all your money in an investment? If not, what’s the maximum amount that’s acceptable to you?
People can become very emotional when it comes to money. Some would panic when they see red (negative) numbers in their portfolio, even if it’s just paper loss. That’s why it’s crucial to be aware of your risk tolerance.
If you hate worrying and you’re afraid to lose a lot of money, then you should probably choose more stable and less volatile investments.
4. What are your investment objectives?
Your investment objectives are your financial goals. To put it in another way, what are you hoping to achieve from investing?
Do you simply want to preserve the value of your money and beat inflation? Or are you hoping to prepare for your child’s college education? Or perhaps, you’re actually looking to create passive income? Then you can invest in a money market fund, an equity fund, and a real estate rental property, respectively.
Remember that investments have different characteristics and behaviors. They can also have different benefits and advantages. Invest in instruments that meet your objectives.
5. How much are your expected returns?
One invests not to simply have more money but to have enough money to afford your goals.
We all have things that we want to buy, want to do, and want to achieve in life. And the reality is these things cost money. But fortunately, investments can help us raise the cash we need to fund our dreams.
Choosing an investment includes asking if that investment can give us the returns we need.
6. What is your financial situation?
Saving and investing can be considered as using your present income for future expenses. However, if your present income is just enough for your present expenses, then it doesn’t make much sense to invest.
That’s why a person’s financial situation is an essential factor when choosing an investment. A person’s cash flow, sources of income, and financial stability affect one’s investment options.
And sometimes, instead of investing, it’s a better idea to first give time and effort to learning how to save and earning more money.
Even after answering these questions, you could still find yourself with many viable investment options. When this happens, then simply choose one and not worry about making a wrong choice because there aren’t any at this point.
Besides, investing is not something that you do only once. It is a habit that you learn and do regularly for years. So, there will be plenty of opportunities to rebalance and reconsider your investment choices.
Lastly, work on creating SMART goals; because when you have clarity on WHY you want to invest, the easier it will be to choose HOW and WHERE to invest.
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I believe a lot of folks fret way too much over timing their investment. Some folks are frozen, wringing their hands but never do make that entry. Now, I love attempting to pick the high of low point for the week when purchasing and especially when selling the weekly series option contracts. For those that plan to buy and hold stocks or ETFs for long periods, I think there is much less pressure. If only more folks would follow Buffett’s advice on being fearful when others are greedy and be greedy when others are fearful. Looking at a chart of the PSEi, what a gift an investor had during the week of 3/22/2020. The US markets went on to make new all time highs. My point? I think you really must ask yourself if you are willing to “strike when the iron is hot?” If your honest answer is NO, find a different, slower paced investment vehicle.
Nice Article Fitz, using the Heroes Approach, helps identify the best options you can choose as an investment vehicle.
Sadly, most Filipinos don’t know this and they’re getting into an investment like crypto or stocks during the bull run, and when their investment is on the losing side they always say this is a scam.