The answer to this question is different for everyone, as it depends on each investor’s unique personal circumstances.
With that said, there are some general factors to consider:
- Your current asset allocation (how your wealth is split between different asset types, like real estate, equities, cryptocurrencies, etc.)
- Your career
- Your appetite for risk
- Your stage in life
Asset allocation is the mix of asset types in your portfolio. While there is debate over just how much this strategic element contributes to an investor’s returns, there is consensus that it’s the most important factor in one’s investment strategy.
What might optimal asset allocation look like? The most important factor is that it includes assets that have no correlation between them. E.g., if you own both gold and equities, the gold will likely rise in value in response to the same event that causes the equities to drop.
So, one question to ask yourself when you’re considering an investment opportunity is, will this fit into the asset allocation I am working towards?
The advantage of building a portfolio from mixed-asset types like this is that it solves the problem of “having all of your eggs in one basket”. And while it may seem like this may keep your wealth stationary – neither growing nor shrinking – the effect is a net positive over the long term, as history shows us most markets slowly rise in value over enough time.
So, one question to ask yourself when you’re considering an investment opportunity is, will this fit into the asset allocation I am working towards?
Your career also plays a factor. If your income is likely to be significantly affected by a particular market event (like an economic downturn in your local area due to the failure of a key industry), it’s critical to make sure your investments aren’t exposed to that same event. Hence, a key question to ask is, will this investment be vulnerable to the same environmental forces as my job is?
Your appetite for risk should also be taken seriously. While history shows us that the more risk investors take over the long term, the better their returns (a phenomenon called the risk/return trade-off), no financial returns are worth the cost of sleepless nights and anxiety.
Therefore, the question to ask yourself is, Will this investment push me out of my comfort zone?
Finally, your stage in life informs which investments are best for you. The younger you are, the more time you have to ride out inevitable market downturns that occur from time to time. With that in mind, it makes sense to choose assets with a larger amount of risk. As you get closer to the date you intend to sell your assets and cash out, you’ll have less room to ride out downturns, and therefore will be attracted to lower-risk assets.
If you’d like examples of high and low-risk assets, that’s explained in the basics we layout in The Masterclass.
You now have a set of questions to ask yourself as you consider your investment opportunities:
- Will this complement my current asset allocation?
- Will this investment push me out of my comfort zone?
- Is this a match for my investment strategy’s time horizon?
You can see that the “best” type of asset for you now is likely to be different from your answer in ten years.
Here is the next article: How do you get started with investing?
***
Disclaimer:
The content of any publication on this website is for informational purposes only.
