What factors drive your decision to invest?

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Mutual Fund Investing
 

 What factors drive your decision to invest?

Every form of investment involves a certain level of decision making. These decisions often depend on information, perceived views and available data, to mention a few. People hold different views when making investment decisions and this is evident in the outcome of their investment. There are those who believe that investing is nothing more than a game of luck and therefore, investing is reduced to the act of “tossing a coin”. Others believe in the prospect of doing some research to achieve results. While the former is often discouraged, the latter can only be beneficial if certain factors are considered. Your investment objective is the most important factor to be considered when investing. However, in this article, we will be focusing on other factors that drive your mutual fund investment decisions.

Determining what stage you fall into in the financial life cycle

A key to being a successful investor is the ability to determine what stage you are in the financial life cycle. It is believed that an individual may fall into any of the following categories;

·         Accumulation Stage – (Below 30 years)

·         Consolidation Stage – (30 – 55 years)

·         Spending & Gifting Stage (Retirement) – (Above 55 years)

While these stages vary in definition by various financial advisors, they serve as a guide in determining what and where your funds should be invested. For example, a young man in his late 20s can afford to take significant risk and hence, invest in equity-based mutual funds. However, if he gets to a point in his financial life cycle that shows that he is better off in less risky investments, he should be willing to make the needed changes, say, from an equity mutual fund to a money market mutual fund. An investment adviser can assist in determining the characteristics and requirements of each stage and proffer the options that suit you.

Balancing Optimism and Perceived Risk

No investor wants to make a loss when investing, even though it is a fact that the value of your investment may go up or down. Bearing this in mind, how do you balance your optimism that the outcome of your investment will be positive with the risk you perceive on such investments? Generally, a successful investor will find the need to be optimistic very helpful and as much as possible, avoid creating room for pessimism. This helps to maintain a healthy outlook on the outcome of your investment. Investing usually involves a leap of faith supported by hard data and this leap turns out to be justified over the long run as long as all indicators (including the fund manager’s decisions) point to the possibility of positive performances over the long term. However, many people make snap decisions due to what they perceive as imminent risks in order to avoid total loss. You can manage this position by assessing your personal risk tolerance and comparing this with a mutual fund's risk level to determine the suitability of the fund to realizing your investment objective.

Focusing on “long term” performance

Most Mutual Funds are known to be beneficial, usually over the long term. This is because they are structured to ride the different market conditions. Whilst an investor’s needs differ, a successful mutual fund investor must think long term! Short-term investors strive to make a lot of money over a relatively short time period, preferring to believe that the future is largely unknown, while long-term investors appear to be much more able to disregard present performance, and willing to earn even moderate returns, but over an extended period. Although the short-term investment is not totally devoid of merit and may work out well for some, usually over a limited period of time; a sizeable number of short-term investors wind up well short of their goals.  The beauty of compounding returns can only be appreciated by a long-term investor whose investment appreciates to larger sums over the years.

By considering these factors, you are better able to make sound decisions which will reduce the odds of the unexpected happening.
 
 

[Oyeleke Toye]

Yeah this is a nice article. I guess am at the accumulation stage
and that's the domain of risky investments. Many times I have a
good run with insane returns and once in a while I make huge
losses but that can't deter me.

My aim is to use this period to accumulate as much as possible from
high yeilding albeit high risk investments so that in the next few
years I can move conveniently to the zone of safer investments
with less returns.

[Ayobami]

Your article on above topic is superb!  I now realised that because I am risk averse that why I did not make much of highly risky (though with higher return prospects) investments when I was in the Accumulation Stage in my Investment life Cycle.  Now that I am in the Consolidation stage, though I have never recorded any significant financial loss, I am not where my peers are today. 

Please advise on how I can still make it good before I arrive at the Spending and Gifting Stage.

More greese to your elbow.

[aberecare]

Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you. But you should also consider the effect that fees and taxes will have on your returns over time.
Degrees of Risk

All funds carry some level of risk. You may lose some or all of the money you invest — your principal — because the securities held by a fund go up and down in value. Dividend or interest payments may also fluctuate as market conditions change.

Before you invest, be sure to read a fund's prospectus and shareholder reports to learn about its investment strategy and the potential risks. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals