Wednesday, September 15, 2010

Investing is like buying clothes

An investment portfolio is not very much different from clothes in a wardrobe as we rely on our financial goals, time horizon and risk appetite when we decide how much we want to invest in each asset class.

Cash, equities and bonds are common investment instruments. All of them come with different degree of risk. Cash is the safest of them all but it will not maintain its value over time because of inflation. Equities which include shares and unit trusts are relatively riskier than cash and bonds.

Equities generally give positive returns if one has a long investing horizon and is able to ride out the volatilities of the market but they are riskier assets. There is a simple rule to calculate the percentage to put in equities, but this formula may not suit everyone.

The optimal combination depends on your risk appetite, risk capacity, financial goals and age. You will be able to sleep soundly through any economic cycle when you have a suitable portfolio that matches all these factors.

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