Choosing the Best Investment Options
Which is the Best Investment Vehicle?
It is easy to feel overwhelmed because of the availability of so many different investment options. To make the situation even more confusing, there are experts giving contradictory opinions on ways of achieving one’s financial goals. This is the reason why ‘which is the best investment vehicle’ is a very common search phrase on Google. One has to remember that there is no single best investment option that is ideal for all circumstances and goals. The best option is dependent upon the financial goals, the starting point, and the circumstances of the individual. The following are the most important factors affecting the choice of investment tool.
• Your personal investment goal
• As an investor, what is your risk tolerance?
• What liquidity levels are required
• Investment tax-ability
• Term required for the financial goal to be realised
• The real costs of the investment
Financial Goals You Must Set for Yourself
Your financial goals are the most important criteria for choosing a particular mode of investment. There are short term, medium term, and finally long term goals keeping in mind what finances you will need in the life after retirement. In addition, there are also the following goals that should also be kept in mind.
Your Emergency Fund- This is a fund that serves financial and medical emergencies as and if they raise their head in the future. This fund should contain money equal to 6 months income of the individual. Funds linked with money market type funds are a good choice for such an emergency fund as they are relatively safe and provide easy access and high liquidity.
Protection of Your Capital- If you are concerned with the safety of your money, you are better off with government bonds and securities as your money is absolutely safe with them even though you have to make do with lower growth. Especially if you have already passed the age of 50 as preservation of capital is a high priority. Another factor to monitor is the rate of inflation in order to avoid losing your purchasing power through inflation depreciation.
Some ways to work around these particular issues is to be in a conservative fund that delivers your basic budget. You could also increase income through a commercial property fund or derive tax free income from fully franked shares.
Growth of capital- If the primary aim of investors is growth of their investment capital at a fast rate, they have to be prepared to take higher than normal risks. There are investment options present in equity markets that offer high growth even though they come with an associated risk. Although this implies short term capital risk, investors shouldn’t be too paranoid, because they will reap the rewards in the medium to long term.
Although property is attractive to many investors over the last 100 years equity prices have shown that equity investments have proven to be the best performers closely followed by property. Of course don’t rush out blindly and start investing in either of these two categories. Rather you need to time your moves and wait until you can find quality shares when they are at their lowest levels.
What is Your Risk tolerance?
This factor governs the choice of investment as they come with varying degrees of risk. Just because an investment is demonstrating high growth at a given point in time, it doesn’t mean it will be the best one further down the track.
Access to Funds
There are investment options that are highly liquid and make available money as and when required. On the other hand, there are low liquidity options like real estate where it is not easy to get access to your capital in an emergency. Some say this is a benefit, because it stops you making spur of the moment decisions that may squander your money. However, you may want to avoid things like art works, Persian rugs, antique furniture etc as they are things that can’t be liquidated quickly.
Smaller company shares are also items that sometimes can be hard to unload in a hurry. On the other hand, money market funds, although not as great as some other investment types can be liquidated swiftly when the need arises. Keep this in mind as fast liquidity can be an important factor for certain types of investment plans.
How attractive an investment option is can in the end game be highly dependent upon the tax liabilities it brings to the investor? You can arrive at selecting the best option after comparing the returns of various options once you deduct the tax liabilities. In other words as opposed to getting starry eyed by looking at the gross return on an investment in should be considered in the light of the net (after tax) return. You should always ask yourself, what is going to end up in my bank account (after tax)?
If an investment is made for a short time period, the best option is to go for conservative investment methods that do not necessarily offer high capital returns. However, when you have a longer time period to wait for the returns, it is better to go with investment options that carry some risk but come with the possibility of attractive capital returns.
What is the Cost to You?
No investment method is free of cost and there are always some administrative and commission costs that you have to pay for utilizing them. In today’s investment markets always realise that the way investment products are structured there’s is usually the opportunity to negotiate commission levels.
No one investment option is perfect for all individuals’ facing different circumstances. You have to consider your options carefully and when available take advantage of any informed decisions from financial planners and/or investment managers to make sure that you are able to achieve your financial goals.
No Need to Settle for Second Best
Nevertheless, besides doing the appropriate research on investment products investors should also realise that some advisors are going to be better than others. So, financial advisors as well as investment managers should be thoroughly vetted before stepping into the investment ring with them.
If you’re unsure how to go about this, you can retain the services of a Qualified Professional Asset Manger to do this for you.