Investing money is arguably the most effective way of "putting your money to work," essentially using existing wealth to generate continuous, future revenue. The sooner a person begins investing, the more money they can accrue through compounded interest rates. To optimize one's financial investments, individuals should consider working with an experienced investment portfolio manager or comparable financial professional. Together, managers and clients can discuss the basics of investing and determine the most prudent steps to take.
Investment time horizon and risk tolerance should serve as two of the earliest areas of emphasis. An investment time horizon refers to the period an individual or group expects to monitor an investment before it reaches maturity. Time horizons only exist in relation to specific goals set by clients, as clients can technically hold onto their investments for as long or short a time as they desire.
The longer a client's time horizon is, the more aggressive a portfolio manager can be with their investments. For example, an investor with more than a decade to work with has room to suffer a few failures while taking risks on the stock market. If a client needs to reach a specific financial objective in a relatively short period, on the other hand, managers will likely take a more conservative route, such as bonds.
Generally speaking, short-term horizons are those of five years or less. Individuals or families often make short-term horizon investments in need of a surplus of cash over the next few years, such as individuals approaching retirement age. In addition to short-term bonds, savings accounts, certificates of deposits, and money market funds represent some of the most effective investments portfolio managers can make on behalf of clients with short-term investment horizons.
By comparison, a medium-term investment horizon plays out between three and 10 years. Long-term savings goals such as college or a first real estate acquisition are often served by medium investment horizon investing, which may include a mix of stocks and bonds. Medium-term investment horizons can be particularly tricky to fulfill, as they require a balance between high- and low-risk assets.
Long-term investment horizons consist of periods beyond 10 or 20 years. By assuming greater risk with these investments, individuals hope to secure greater benefits at the end of the investment term. Some of the most common investment tools and products that can help optimize retirement planning include 401(k)s and various types of individual retirement accounts (IRA).
Risk tolerance is closely linked to investment time horizons; it describes an investor or portfolio's ability to withstand variability concerning returns on investment. In other words, a portfolio that can survive and remain productive despite multiple investments failing to turn a profit would be described as having high-risk tolerance. If a single investment yielding a portion of the expected return creates trouble for investors, the portfolio in question has low-risk tolerance.
Individuals, families, and businesses must discuss risk tolerance at length with investment professionals. Without a realistic understanding of their financial positioning, clients risk failing to reach their financial objectives and losing their investments.
