The Importance of Investment
Investment is a key component in personal financial planning.
It is difficult to imagine achieving any major financial goals without investing because of the rising cost of living. Due to inflation, $1 may not be enough to buy 1 cup of coffee in 20 years time. To combat inflation, investing is necessary.
Different people have different reasons for investing. Some people invest in order to supplement their current income, while others make investment decisions to reduce their tax liability.
Short-Term Speculator vs Long-term Investor
In the past, there is a sharp distinction between investment and speculation.
High-grade bonds were considered investments, while ordinary stocks were viewed as speculative. But nowadays, such distinctions are becoming fuzzy or blurred.
Good-grade blue-chip ordinary stocks are often regarded as investment-grade securities, while below-investment-grade bonds generally are not. Investors today have also become more sophisticated. Many invest for capital gains, as well as for dividends distributions.
Speculators generally buy securities or other assets, with the objective that their fluctuations in price will produce relatively large profits over a short period of time. In short, they take risks in the hope of almost immediate and sizable gains. A example is the foreign exchange market, where people trade currencies and make use of leverage to enhance profit and loss margins.
While speculation is not necessarily bad, most people are not prepared to speculate. This is because majority of people lack the knowledge, discipline, and tools to monitor price fluctuations and time the market entries and exits.
Most investors are better off investing conservatively for the long term by using a buy and hold strategy. However, this also depends on your risk tolerance and financial goals.
If you need help to build a investment portfolio suitable for your risk tolerance and financial goals, please contact your FLA financial planner for consultation today.
