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5 Financial Tips To Make Good Investment Plans

A great way to accumulate personal wealth is through investment. However, navigating the financial markets is not always easy, even for those with cash to spare for real estate investments or stock purchases. Volatility in financial markets and currency exchange rates can be costly for investors who fail to diversify their investments.

This article equips you with the necessary information to ensure you realize your long-term financial objectives and manage risk.

Develop a sound financial plan

Failure to plan is planning to fail. Investors should carefully consider their financial situation before committing hard-earned money to any investment. When developing an investment roadmap, start by defining your financial goals and establishing your risk appetite.

Financial Tips

Consider engaging a credible financial advisor to help you set achievable financial targets. Every investment carries an element of risk with no guarantees of return on investment. However, having a good investment roadmap can minimize risk and increase your chances of achieving financial security in the long term.

Understanding and managing risk

While all investments carry an element of risk, some are riskier than others. For example, fixed income bonds secured by the government tend to be less risky than corporate bonds. National governments have a better capacity to repay borrowed funds due to their multiple income streams than private companies.

However, riskier investments such as stocks, mutual funds, and real estate tend to generate better returns than federally insured bonds because the reward for risk-taking is high returns.

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Secondly, investments that have a long-time horizon generate better returns for investors because such investments are subject to a greater degree of risk.

The main concern for both individual and corporate investors is inflation risk and foreign exchange risk, which potentially erode investment over time. An excellent way to minimize inflation and foreign exchange risk is by investing in short-term, fast-maturing financial assets.

Use of leverage

Some asset classes such as real estate require significant financial outlay that many individual investors struggle to raise. Leverage allows such investors to include these assets in their portfolios by raising only a portion of the amount and borrowing the rest.

Leverage also magnifies the cash flows and returns on investment if the asset value moves in favour of the investor. However, the use of debt in asset acquisition exposes the investor to a heightened degree of risk.

Investors who can meet investment requirements without the need to borrow should avoid using leverage. According to Delaware statutory trust, Investors approaching retirement should also avoid employing high leverage strategies to reduce risk exposure.

Portfolio diversification

Investors should minimize financial risk by including uncorrelated assets in their investment portfolio. Uncorrelated assets are those whose values move in different directions under dynamic market conditions. For example, historically, stocks, bonds, and cash equivalents tend to respond differently to market shocks.

Savvy investors include at least one asset in each category to avoid losing money even when the local and global economies are under recess. The secret in successfully diversifying a portfolio lies in asset allocation strategies. Asset allocation refers to the proportion of each asset category in the investor’s portfolio.

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Asset allocation helps in balancing risk and returns to match the investor’s financial needs. Asset allocation strategies vary depending on the investment horizon of the investor and their risk appetite. It is advisable to involve an investment analyst in asset allocation and portfolio diversification.

Have an emergency fund

One of the secrets of smart investing involves maintaining an emergency fund to cushion against sudden loss of income through unemployment or investment loss. Modern financial markets are becoming more unpredictable, meaning even investors with sound financial plans are not exempt from failed investments.

Financial experts recommend setting aside a portion of your income, equivalent to a few months of your salary or monthly income, to cater for unforeseen events. Emergency funds ensure you and your family stay afloat even in the most trying financial times.

Bonus tips

Though modern investment strategies heavily rely on debt, it is advisable to stick to low-interest debt facilities. Credit cards generally carry high interest and should be cleared as soon as possible. Lastly, intelligent investors research thoroughly before investing to avoid falling for scams and fraud.

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