When it comes to investing, one of the key questions is how much you should invest. The answer largely depends on your financial targets, and how much you can afford to put aside without risking your personal financial stability. Setting realistic investment goals is crucially important to keep your motivation and discipline in line.
To begin, you want to set your target and your timeframe.
Let’s say you have enough capital to retire at the age of 65, and set aside money for your children’s college education. Retirement calculators can help you with your retirement plan and define your target sum. Using a savings calculator, you can set up your customized savings plan or how much you have to invest monthly to meet your target. Stick to this amount, otherwise your savings plan will unravel. Creating a habit is key.
The amount you invest also depends on your attitude to risk. If you prefer more stable investments, you might need to avoid stocks (or allocate a smaller portion of the overall amount to them) and increase the amount you invest in a month. The common advice is to save and invest between 10 and 15 percent of your annual income.
Risk taking also depends on how much time you have for investing. The more time you have, the more it makes sense to invest in stocks, and other riskier assets, as you have more time to even out the dips in the market. The less time you have, the more likely you want stability, in which case you could invest in bonds for instance.
Diversify! Diversification is key to managing risks. To reduce risk it's best to hold a wide variety of assets, including stocks, bonds, mutual funds and index funds. Alo pay attention to rebalancing your portfolio regularly.
Vinit Pagaria, head of data and research at StockEdge, an Indian equity research and analytics platform, shares his insights on when to rebalance a portfolio.
"Rebalancing a portfolio is an extremely important activity for investors as it keeps the portfolio risk-return profile aligned with the investor's requirements. The things that need consideration with regard to timing of the rebalancing are:
Changes in the market value leading to allocations moving beyond the tolerance range (for example, if an equity target weight is 40% with +-10% tolerance band, and due to an increase in the value of investments the same goes beyond 50%, then the portfolio will need rebalancing on breaching the tolerance range).
Changes in the external environment making a particular asset class more lucrative or riskier (for example, if debt instruments with high modified duration had a target weight of 20%, the same might be reduced if there is a clear likelihood of increasing interest rates as a result of central bank policy. The reduction however, still should be within the defined tolerance range).
Changes in the circumstances of the investor (for example, if the investor is suddenly facing financial hardship, the portfolio target weights may require changes)."
If you are comfortable with riskier assets, you should remember not to invest more than you can afford to lose. And you should set aside an emergency fund equaling 3-6 months of expenses in case an investment goes belly up.
In terms of taking more risk, you should consider the potential benefit of alternative assets, such as futures and forex trading, due to the fact that they offer increased leverage. It means you can use a relatively small amount of your own capital to control a relatively large one as you are essentially investing borrowed money. Commodity futures trading for instance typically offers leverage around 10:1. But keep in mind that leverage works in both directions: while it can amplify your profits, it will also boost losses and you may end up losing more than your investment.
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