Layers of Investing – where to begin
T
he range of options available to investors can often be overwhelming. Where do you even begin? To answer this question it can be useful to break your investment decisions into three simplified layers:
1.
The ‘why layer’ tries to establish exactly what your investment objectives are. It attempts to answer the question as to why is it that you want to invest. 2. The ‘when layer’ tries to match your investment objective with an appropriate investment time horizon of the solution considered. 3. The ‘where layer’ tries to tie together your investment objective, appropriate time horizon and investment geography. Within each layer come other considerations, so let’s go through each one in more detail.
to the projected length of time over which an investment is made or held before it is liquidated. This might sound a bit technical but the concept is actually very simple.
The Why Layer The why layer is a good starting block on which to base Going back to our previous examples: You need a certain your investment decision as it lays the foundation for amount to put down a deposit on a house in 12 months’ asset classes that might be appropriate for you, given your time. Let’s work with a future value of N$100,000. Thus objectives. Your ‘why’ might be that you your investment objective is N$100,000, your would like to put down a deposit on a house in time horizon is 12 months and your volatility 12 months’ time. In that case an investment ...when you finally risk profile would most likely be very low. A that could be characterised as short-term low volatility profile means that you are not might be appropriate. Alternatively, your need the funds as willing to see large fluctuations in the value ‘why’ might be that you would like to start of your investment and would prefer a steady per the original planning for your retirement right from your rate with a steady return that will result in objective, you very first paycheck (good for you). In this the amount of N$100,000 with a high level case an investment characterised as longdon’t want to of predictability. For instance, if you worked term might make more sense. Either way, on a money market rate of 7.5% on an be in a situation you have now established a ‘why’ and can where timing in the annualised basis (compounding monthly) move on to the ‘when’. you could calculate what you would need
markets worked to put away per month to reach your future The When Layer value of N$100,000. In this instance you against you... Now let us consider your investment time would need to put away ~N$8,050 per month horizon and your volatility risk profile. A for 12 months to reach your objective. volatility risk profile refers to up and down movements on your investments and how willing you are to As another example let us consider a 30-year-old who is absorb these movements, whereas your time horizon refers saving for her/his retirement. Now the time horizon is 30
