FBNQuest Asset Management Discusses ABC of Personal Finance Part 2

Ability to Take Risk

This is your financial capacity to take risks. It depends on factors such as your income, savings, financial obligations, and investment time horizon.

For example, higher income and substantial savings can increase your ability to take risks, high debt levels or significant financial responsibilities (like supporting a family) can reduce your ability to take risks, the longer your investment time frame, the more risk you can typically afford to take, as you have more time to recover from potential losses.

Balancing Willingness and Ability

Effective financial planning involves balancing your willingness and ability to take risks. Here are a few steps to consider: Assess Your Risk Tolerance, Evaluate Your Financial Situation, Diversify Your Investments and Adjust Over Time.

Understanding your willingness and ability to take risks helps you make informed investment decisions that align with your financial goals and comfort level.

• Liquidity Needs

This refers to how quickly and easily an asset can be converted into cash without significantly affecting its value.

Liquidity need is the requirement to have access to cash or easily convertible assets to meet short-term financial obligations or unexpected expenses. While liquid assets offer safety and flexibility, they typically yield lower returns compared to less liquid investments.

Balancing your portfolio to meet both liquidity needs, and long-term growth goals is essential. Understanding your liquidity needs ensures you have the right mix of assets to meet both immediate and future financial goals.

• The investment duration

This directly influences the investment objective. In essence, the longer the investment horizon, the greater the potential for risk and reward.

However, it’s crucial to align the investment duration with the investment objective to achieve financial goals effectively.

Short-term objectives: Investors typically seek investments that offer liquidity and stability. Examples include money market funds, certificates of deposit (CDs), and short-term government bonds.

Medium-term objectives: These investors often balance growth and income. They may consider a mix of stocks, bonds, and mutual funds.

Long-term objectives: Investors with a long-term horizon can tolerate higher risk for potentially higher returns. They may invest in stocks, real estate, and other growth-oriented assets.

Example: A young investor aiming to accumulate wealth for retirement (long-term objective) might invest in stocks, which historically offer higher returns over the long run while an investor nearing retirement seeking steady income (short-term objective) might prefer bonds and dividend-paying stocks.

1. Understanding Various Investment Vehicle

An investment vehicle is a financial product or account that allows individuals and institutional investors to invest their money with the aim of generating profit or returns. These vehicles come in various forms, each carrying its own risks and rewards.

The best investment vehicle for you will depend on your individual circumstances and financial goals. Consulting with a financial advisor can help you make informed decisions. Here are some of the most popular investment vehicles:

• Stocks: A type of investment that gives you partial ownership of a publicly traded company. Such ownership entitles you to any dividends that may be paid, and you may experience gains or losses on your holdings over time. Potential for high returns but higher risk. E.g. shares of FBN holdings.
• Bonds: A debt instrument, a bond is essentially a loan that you are giving to a governmental entity or a company in exchange for a pre-set interest rate. Typically, the bond pays periodic interest (coupon payments) during its term, and it matures on a specific date. Steady income but moderate risk.
• Mutual Funds: An investment vehicle that allows you to invest your money in a professionally managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, or other investments. E.g. FBN Money Market Fund.
• Exchange-Traded Funds (ETFs): Like mutual funds but traded on stock exchanges, offering more flexibility and potentially lower costs.
• Real Estate: Investing in physical property, such as houses, apartments, or commercial buildings.
• Derivatives: Financial contracts based on an underlying asset (e.g., options, futures). This is also a high-risk investment.
• Commodities: Physical assets like gold, oil, or agricultural products.

Other consideration when choosing an investment vehicle

• Diversification benefit Fees and expenses      Reputation of the Financial Advisor

2. Stay Informed & Continuous learning (A way to take ownership of your finances)

Certainly, improving your financial literacy is a valuable endeavour that can empower you to make informed decisions and better manage your personal finances.

Remember, continuous learning is key to improving your financial literacy. Here are some effective ways to enhance your financial knowledge:

• Read Books and Magazines Visit Financial Websites
• Attend Local Presentations/Webinar Seek Expert Advice

Common Investment Mistakes

Here we highlight the past mistakes people have made while making an investment decision.

The aim is to prevent us from doing same and better equip ourselves to make better investment decisions. Investing is a journey, and learning from missteps can lead to better outcomes.

• Not setting financial goals Not diversifying
• Not learning from your mistakes Not doing your research

In conclusion, monitoring and reassessment are crucial components of successful personal finance management. It is not just enough to execute the actions above; it is important to imbibe the culture of discipline to achieve your financial objectives.

Remember, the journey to financial well-being is a marathon, not a sprint. Stay committed, stay informed, and your future self will thank you.