Are you Ready To Invest?

Your first investment might be frightening and exciting, because you do not know when or how to start investing. When you look at the historical prices of some shares, they have gone up and down, so how do you know when to jump in and start buying?
As a long term investor, the time horizon for your investment should be around 5 years, this is from the time you buy to the time you sell. Thus, short term volatility should not change your decision on when to invest. The markets will inevitably rise and fall, but short term volatility should not matter as long as the long term gains are there.

In an earlier section to this guide, we discuss the importance of diversification and share selection. The shares you select will form the portfolio in which you diversify risks. But firstly, you have to ask yourself some questions about your investment goals.

• What is your time frame? 2 years, 5 years, 10 years?
• How risk adverse are you? (Are you willing to forego returns for a less risky investment?)
• Do you prefer capital growth over dividend yield (dividend payments)?

In answering these questions, it’s useful to know how shares are categorised, what their inherent risks and returns are:

1. Blue Chip – you hear this term in the media commonly and this refers to shares which are the most establish in terms of stability of earnings and history. They generally pay a steady dividend and maintain steady capital growth. These are deemed the least risky shares.
2. Income – these shares usually pay a larger dividend to attract investors who do not want to sell their shares to generate income. Because they are paying dividends, the usually grow slower due to lower reinvestment.
3. Growth – these are usually newly listed shares which have high growth and have little or no dividends. In lieu of dividends, investors receive a higher capital growth, as the company uses the profits to reinvest back into the business. In recent times, these have been typically technology and mining shares.
4. Cyclical – these are linked to the economic cycle which means when the general economy is performing poorly, these share will mirror the general economy’s performance and fall.
5. Defensive – these are the opposite of cyclical shares and usually perform in the same way despite the economy being in a recession. Typically, companies of this nature will sell good and services such as insurance, staple food and pharmaceuticals.

A mixture of the above share will provide good diversification in a portfolio, thereby reducing the risks.