The investor’s commitment to his/her financial plans is increased if it were written instead of just following impulses without any organization. The first step then is to write down the investment goals and arrange them according to their importance and then specify the amounts to be invested to reach those goals based on the investment time available.
Long Term vs Short Term Investments
The investor’s knowledge of the time available to reach his/her investment goals represents the biggest part in choosing the best investment strategy. Short term goals are when the investor wants to achieve his/her goals in the next few years. Medium term goals are those to be achieved in the next five to ten years and whatever exceeds that then it is long term. Long term investments give the investor more flexibility to maintain risks in order to have more returns. And on the contrary, when the term is shorter , the investor is less comfortable to maintain higher risks as there would not be any time to compensate any losses. Hence, the longtime associated with long term investments helps the investor to deal with more aggressive investment strategies towards risk by focusing on investments that allow more room to grow. While the short time associated with short term investments makes the investor focus on conservative investment strategies with low risks which would not bring in any high returns. If the investor adopts medium term goals, then he/she needs to combine high and low risk investments at the same time. By time, the investor’s long term goals would turn into short term goals. For that, it is important to reevaluate the investments every year to measure the progress and to decide if it is time to change the objectives of his/her investment plan by transferring some investments form high risk investments to conservative and low risk investments.
Liquidity
In addition to balancing risk and return in investments, the investor should balance the return and liquidity of these investments. Liquidity here means that the investor is able to transfer the investments into cash. For example, the money deposited in a saving account is considered a highly liquid money as the investor can withdraw it whenever needed and in short time without any losses. On the other hand, the liquidity in real estate investments is very low. It would be hard to find a buyer quickly if an investor owns a property and wanted to liquefy this investment. The investor even might accept some loss by decreasing the price of the property to sell it quickly. Moreover, the time to find a buyer might be longer if the investor insisted on a specific price.
Shares differ in its ability to be liquefied into cash. If the share is always highly traded by buying and selling orders, it would be easy to sell it with the market price if the investor needed some liquidity. But if the trading was low on a specific share then it would be hard to quickly sell and get a fair price. This is what is called poor liquidity in an investment.