The Safer Way to Invest
So how can I invest without risking my hard-earned money? The following chapters look into a simple approach:
• Figure out when you intend to use savings and invest according to this, so you avoid too much risk.
• Utilize bank accounts for short-term deposits.
• Use bonds for medium term investments.
• Invest in the stock market using ETFs for the long-term.
These are the basic elements, but it is a little more complicated primarily due to the stock market and the quite drastic swings in stock prices that may hit you.
Remember to consider the cost of an investment against your expected return. Depending on how much your bank will charge in commission, you should avoid buying bonds, shares or ETFs in too small chunks.
Let us start by looking at handling risk.
Handling Risk in Your Investments
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A piece of paper will do fine:
Weight of investments in each risk group
Horizon in years and purpose Bank accounts Bonds matching investment horizon Non-cyclical domestic shares Cyclical domestic shares Foreign shares
Developed countries Foreign shares
3. World Overall risk profile
0-1 Buffer 10.000 - - - - - No risk
1-4 New car 10.000 20.000 - - - - No risk
4-8 Down payment - 40.000 40.000 - - - Low risk
8-10 Pension - - 70.000 60.000 50.000 40.000 Low risk
Short term risk Low risk Low risk Medium risk Medium to high risk High risk Very high risk
The first column with time horizons in the left side of the table deserves explanation:
• 0-1 year - Buffer: Savings for unforeseen expenses are safest placed in a bank account.
• 1-4 years - New car: Savings for a new car would be safe placed in short bonds matching this time horizon or placing the money in a bank account, etc. Moreover, it is normally possible to achieve a reasonable interest rate on a bank account, if placing a large amount for a set period, so check possibilities with your local
Obviously in my long term deposit I profited as as I received a 2.55% increase per annum. Therefore ever week I received an extra $24.52. I discovered that investing your money in to a long term deposit is a risk free way of gaining interest on your investment however it is beneficial to keep your money in a term deposit over a longer period of time so you maximize that 2.55% interest.
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