Set Goals For Your Future
By “investment portfolio”, we mean nothing more than the set of all financial instruments owned by an investor. The parameters according to which it should be created are:
- performance targets
- time span
- your risk appetite
In the previous article, we went over how to manage your finances, by answering the question: how much capital should I invest?
Today we will address the next questions: where and for how long should I invest?
HOW LONG: How long should I keep an investment?
Set Your Goals
Depending on your economic situation and ambitions, you should set your investment objectives.
For some, the objectives may correspond to needs that emerged during the analysis of the net worth and cashflow, such as excessive debt that must be paid off.
Or the analysis of Step 1 may show that there is positive cash flow but virtually no assets. In this case, the first objective may be to increase your assets. Others may be to create a retirement fund, improve your lifestyle, become self-employed.
Once needs and objectives have been identified, they should be placed on a realistic and functional timeline.
In the economic world we speak of the short, medium and long term.
The goal determines how long you need to keep your money invested and the type of preliminary analysis required to choose the right instrument.
Invest By Facts, Not Emotions
Analysing the markets involves two types of analysis that helps traders to make predictions about prices and trends of their investments.
- Fundamental analysis: the collection and interpretation data from companies’ balance sheets and macroeconomic factors. If, for instance, I wanted to invest in the stocks of a given company, I would check its public reports and analyse its sector.
- Technical analysis: it involves mainly the interpretation of price trend charts and other metrics of the given asset (the company’s stocks, for instance). These are easy to find, simply by searching on Google you can find constantly updated data.
Difference Between Technical and Fundamental Analysis
The main difference between technical and fundamental analysis is simple: fundamental analysis studies the intrinsic value of a financial instrument, an action, a market or a specific economy. In order to do so, it uses synthetic indicators, such as the unemployment rate, inflation, the level of interest rates, imports and exports, retail sales, consumer confidence, etc.
The technical analysis, instead, is based on the historical figures of the market (i.e. graphs), with the conviction that an identical graphic formation of the past must generate the same movement in the future of prices.
Even if some graphic formations repeat themselves, during the negotiation hours other variables (mostly related to the fundamental analysis) can intervene, interrupting the graphic formation and causing a different result.
Technical analysis is not a science, although it is based on some mathematical considerations. No one can guarantee that a certain trend that occurred in the past can also occur in the future. Therefore, it is better to use probabilistic terms. A certain movement can occur with a higher or lower percentage of probability, without eliminating the risk and the possibility of error.
Since finding reliable and complete information for cryptocurrencies is more difficult, we will dedicate to this type of analysis the articles Analyze the Cryptocurrency Market and Market Order, Limit Order and Stop Order.
WHERE: What should I invest in?
Find out what kind of investor you are
Knowing yourself and your risk appetite is fundamental before making an investment.
Risk appetite is the ability to withstand the uncertainty associated with an investment and it is expressed by a coefficient (a number).
Calculate Your Risk Appetite
Risk appetite can be broken down into two aspects:
- first, the risk capacity – how much an investor can bear a loss without changing his or her standard of living.
- second, the risk tolerance, is more subjective and indicates an investor’s tolerance to loss before he or she becomes anxious and loses control.
You can calculate your risk profile on any online site that offers a free test. All you have to do is fill in the questions in absolute honesty.
By analysing your risk aversion and considering your objectives, you will get a trade-off between risk and return suitable for each type of investor.
An investor with little time to devote to market research, looking for inexpensive and low-risk solutions. Favours assets such as ETFs, low risk and long-term investments. The passive management of ETFs saves you from having to choose personally the assets you invest in.
An investor who has little time to devote to market research, who has more spending power and is ready to invest also in high-risk assets. Willing to choose mutual funds, which are more expensive than ETFs but are managed actively. Because of this, they can guarantee higher returns.
An investor who wants to manage their investments independently, studying the market, keeping a low-risk profile. Bonds, Government Bonds and Equities are the preferred options. They keep a long-term vision, but pretend a higher return in the medium term as well.
Spends a lot of time reading market movements, keeping a high risk/return profile. Prefers forex, commodities and innovative high-risk assets with a view to portfolio diversification. They look for tangible results in the short or very short term.