Starting from scratch in any aspect of life can be challenging. But with the right motivation, clear objectives, and expert guidance, achieving success can be possible. This is especially the case when it comes to managing personal finances and investments.
The first step is to think about the objectives. It is key to have a clear understanding of what is intended to be achieved with the investments and what objectives we are pursuing in the short, medium, and long term. Ask yourself questions like: Why am I investing? What do I want to achieve? How do I achieve it?
These questions might not find immediate answers, which highlights the importance of having the support of a professional. Professional advice eases decision-making based on solid knowledge and helps us visualize the general context instead of focusing only on the details.
With the help of a financial advisor, the next step is to visualize the path, see how long it will take to achieve the objectives. Short-term goals could be buying a vehicle, paying for a vacation, or purchasing real estate. Long-term goals might range from planning family life with children, paying for schools, covering the health of the entire family, or retirement plans to live without worries in the future.
To achieve short-term goals, the key is to invest with a more conservative profile since we have less time to recover in case the money is needed urgently. Meanwhile, in the long term, there is room to take on a higher level of risk in search of greater returns. There is a direct relationship between the level of risk an investor is willing to take and the potential return they could obtain. The higher the risk, the greater the possibility of achieving significant gains, but the risk of losses also increases. Conversely, opting for lower-risk investments reduces return expectations as well as the risk of incurring losses.
Some of the questions a financial advisor will ask are about goals and limitations in investing. These goals and limitations evolve over time. What we seek at 20 is not the same as what we try to achieve at 40 or 60 years old. Individual goals might focus more on asset performance or the risk management to be taken with the investment. Some people want to achieve a specific annual return while others seek to take as little risk as possible. Limitations often relate to liquidity needs, investment horizon, tax or legal issues, and personal circumstances such as family or health matters.
Based on all these inquiries, the advisor will determine the investor profile. This profile is key for the advisor to provide investment alternatives to the client and design a tailor-made portfolio to achieve their goals. There are 3 investment profiles:
Conservative Profile: This profile admits very low risk, seeks to preserve capital, and aims for minimal gain. Prefers to invest in low-volatility assets, showing high risk aversion.
Moderate Profile: This profile seeks to balance stability and wealth growth, tolerating intermediate risk exposure. The key for this investor lies in portfolio diversification.
Aggressive Profile: This profile aims to maximize returns, with high risk exposure. Invests most of the capital in assets with a potential return above average and considers diversification essential to minimize risks. This type of investor has greater experience and knowledge of the markets.
A person should not have a single profile throughout their life, but there are several financial stages correlated with the passage of time. These stages can be divided into:
1. Education: stage where knowledge is absorbed and serves as the foundation on which we build our financial lives.
2. Early career stages: Corresponds to the start of working life, usually between ages 18 and 22, with modest initial incomes. It’s an ideal phase to establish solid foundations without many financial obligations.
3. Career development: Characterized by an increase in income and responsibilities. It is a period for forming families, and long-term financial planning becomes crucial as the savings from this stage will support the future.
4. Career peak: This stage brings the highest income of the professional career, focusing on saving for retirement and family needs, such as children’s education. It typically occurs between ages 40 and 60.
5. Pre-retirement: The transition period to retirement, where minimizing investment risks becomes crucial due to the shorter timeframe available to recover the capital allocated for retirement.
6. Retirement: With more free time, expenses may increase, especially in healthcare and leisure.
Aware of our stage of life and risk profile, it is time to consider what are the keys to starting the journey in the capital markets, in which financial instruments to invest, selecting those that best align with our current and future financial goals and needs.
But we will cover that in our next financial column on keys to start investing.
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