LOUISE FAIRSAVE: Investment choices
Your choice of investment depends on your circumstances and preferences – your age, the size of your immediate family, the number of your dependents, your disposition to risks, your health and the health of your family, just to name a few of the more important variables. In this article, let us examine how your investment choices are affected.
If you have just started your working career in your 20s, you will look at your investment possibilities differently compared to a much older person. Your propensity for risk-taking is likely to be much higher than a retired person. A retiree tends to be interested in maintaining a reasonable lifestyle for the full period of retirement. You, on the other hand, will tend to look at a wider range of investment opportunities.
Your age is often used to define your financial life stage. Between birth and young adulthood, the typical youth earns little or no income. The first job will provide entry level pay. Gradually over the years with promotions, cost of living increases, merit increases and other pay adjustments, the original starting salary increases. Then on retirement, the final salary level will tend to drop by at least 30 per cent to the pension level until death. Depending on where you are along this typical earning and saving pathway, your disposition to investing tends to differ.
You will need also to consider the size of your immediate family. If you are a happy-go-lucky bachelor with plans to remain so for the remainder of your life, your investment choices will tend to be different from the young mother of three who may be a single parent.
Alternately, you may be married with no children or divorced with children. The size of your immediate family or your planned family and your need to make adequate provision for them should guide your investment choices.
What about your willingness to take risks? The greater risk you are willing to take, the greater the likelihood of a premium return. Modest risks will typically give a modest return. You get to choose the level of risk you are willing to take.
A good example is in securing a mortgage for a house that you intend to serve as an investment vehicle. Some investors will not be comfortable with this investment. They would be fearful that if the house is not rented for three to four months, they may lose on the investment.
The return on the government savings bonds involves less risk, yet the investment in bonds is likely to give a much lower return on investment than the real estate venture. Such is the risk/return trade-off.
And risks, like comfort, come in the full range. You can be extremely risky – like investing your whole month’s salary in Lotto when the chips are high – or you can be ultraconservative and bank your funds under your mattress – no risks, no return! In other words, you can be very uncomfortable or you can be too comfortable for your own good. The point is, never envy anyone their higher returns unless you are willing to face similar risks.
Sound in mind and sound in body, too. If you are not too healthy, or have a predisposition to ill-health in your family, your investment choices should accordingly be so guided. Health, mentally and physically, is just one more factor that should be considered in making your investment choices.
So let’s invest. We’re different and will make different choices. So, please don’t follow my suit.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.