Previously we had discussed the objectives for investing. Why do you want to invest in the first place? Is it for a comfortable retirement or to pay those college fees for your ward or to develop that land you bought sometime back? All of these and many other reasons should form the basis of your investment and decisions there on. Don’t invest just for the sake of it.
I do hope now you understand why you must work on the objectives of your investments.
Now that we have put together the objectives of our investments, we need to determine whether these objectives are long term, medium term or short term objectives.
Any objective that must be achieved within 1 year is typically classified as a short term, while a long term objective is one that is typically 10 years and above.
Determining the time horizon is important because it helps in deciding how much funds you need to set aside (whether in bulk or regular contributions), the type of investment portfolio to build, and the risk to take among others.
Generally, when your objectives are short term, your risk tolerance is low, while with a long term objective, the risk tolerance is normally high. This is because the long term objective allow for space to manage risk better than a short term objective.
Short term objectives – as indicated earlier, short term objectives hardly go beyond a year. It is typically objectives that must be achieved within a year. This may include planning towards your vacation; paying up your yearly rent; paying up the fees of your wards in school etc.
Medium term objectives – these are objectives that are normally targeted for between 5 to 10 years. These may include setting aside funds for college education of your kids, acquiring a property, starting up an entrepreneurial project or starting a new business etc.
Long term objective – these are objectives that are designed for projects or programs 10 years and above. These may include retirement planning to ensure a comfortable pension, towards acquiring or putting up your dream home, or settling back into your country after your long stay abroad. Because these objectives are long term, you have time to better manage the risk that comes along with it.
Remember that this is not a one-size fits all discussion. An individual or couple’s medium term may be another person’s short term etc.
As we continue these discussions in subsequent editions you would come to appreciate further why the time horizon is important to achieving your objectives taking your risk profile into consideration.
I will come your way again. Until then, enjoy a great week. I remain KA.
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