Quote:
Originally Posted by Dry Ice  Note: That is a hypothetical question concerning investment scenarios and one should consult professionals and practice due diligence and serious research before engaging in any type of investment, the answers that might be provided in this thread are purely on an informative basis and do not constitute a professional approach to investment.
Hello everyone,
Supposing a scenario where you would have some cash and would like to invest it beyond a bank saving account; where would you recommend making an investment if considering a relatively liquid environment (mutual fund/stock markets) and what type of return on investment would you consider reasonable over a period of 3 years?
Thoughts appreciated |
It is difficult to answer your question without more information about you. Textbook portfolio management specifies the following factors in determining how you should invest:
- Return objectives
- Risk tolerance: how much risk you are able/willing to assume in order to reach your return objectives. You specified a 5-10% loss on your investment. If that is an annual figure I would characterize your risk tolerance as average to above-average.
The best way to determine your risk and return objectives is to make an appointment with an investment professional who will run you through questionnaires that will help to accurately determine your objectives.
- Time horizon: the younger you are, the higher your ability to take risk
- Tax considerations: capital gains are taxable in the US/Canada. If you are investing for retirement, perhaps you should consider tax-shielded/tax-deferred accounts.
- Liquidity requirements: you should have at least 6 months' worth of living expenses in liquid investments or cash.
- Legal considerations
- Unique circumstances: e.g. do you have a special cash outflow that you expect at a certain point in time? (college tuition for children, for example)
Another important thing to do is to look at your investment in a
total portfolio context, i.e. in conjunction with your other investments or assets that you own. Whether you already own equities will affect whether it is right for you to invest in more equities. If you own real estate in large values, then it may not be appropriate to invest in real estate investments.
Which brings me to my last point: diversification. This is probably the single most important concept that you need to know as an individual investor. By being well-diversified across financial instruments and geographic markets, you eliminate a portion of risk of your portfolio that would otherwise be there. A well-diversified investor will own both equities and fixed income, and will be invested in several geographic markets (not only the US, for example). A good rule of thumb for your equity/fixed income proportion is to use your age as the percentage of fixed income, i.e. if you are 30, your portfolio should be 30% bonds in value.
Finally, while there may be significant opportunities in FX trading or investing in a single emerging market like Qatar, I would say it would be generally risky to do that
only. A good (yet much less sexy) investment would be to put your cash in money-market instruments, like 1y T-Bills (they yield around 4% right now). They are very liquid investments (the only more liquid one is cash), so you have access to your cash at any time, and you make a return that at least protects you against inflation.
The best thing to do is to make an appointment with an investment professional at an asset management firm, who will help you identify the best way to grow your money.
9th October 2007
11th October 2007
