Before beginning on one's investment journey, it is important that one understands what he wants to achieve out of his investments and his unique investing personality. For starters, some factors that he may like to answer are:

• How much risk can you take? (Risk Tolerance)
• How much do you need?
• How long are you willing and able to wait before you see profits? (Investment Horizon)

Risk Tolerance

Tradeoff: Lower Risk, Lower Return

The old adage that there is no free lunch in markets is probably true. In the investment world, riskier investments typically reward investors with greater returns! Hence, in conjunction with determining How Much You Need, understanding your risk tolerance is also crucial in determining your ideal balance of risk and return on an investment.

One may perhaps find it helpful to answer questions such as: 'How much am I willing/able to lose?' and 'How much volatility on returns am I comfortable with in order to stay vested?'

Different asset classes (broad-based classification of investments such as 'stocks', 'bonds', 'money market instruments', 'alternative investments', 'ETFs' and 'unit trusts') entail different levels of risk. For instance, stocks generally pose higher risks compared bonds as their prices are much more volatile (may rise and fall more drastically and frequently) than that of bonds. The risk varies even within asset classes. For example, the stocks of young companies or companies in high growth industries can be riskier than other stocks as their prices are more volatile. For a more comprehensive introduction to the various asset classes, do refer to the respective sections under 'An Introduction To Various Investment Products'!

Think you are the conservative type that can stomach very little risk? Well, the truth is that you can probably handle a lot more risk than you think. You simply have to recognize the dangers that exist, and learn some easy strategies to protect yourself!

How Much You Need

Answer this: 'How much cash do I need in the future and when do I need the cash by?' By listing down the financial commitments in your life, which may probably include retirement financial goals, you would thus be able to more clearly see how much you need and therefore, have a better idea of the amount of returns you should ideally aim to achieve. Aside from enabling you to have a better idea of the amount of returns you should aim for, it also tells you more about your risk-return profile, putting you a step closer to identifying the type of investments which would be best suited for you. Additionally, not knowing the amount you need may constantly put you in the stressful state of 'needing more' as you are unclear of how much is enough.

Investment Horizon

Tradeoff: Shorter investment horizon, Lower probability of positive returns

The next question you have to ask yourself is: 'How soon do I need or want to see returns on my investments?'

While listing your financial commitments would give you a good gauge as to the amount of returns you should aim to achieve, the act also reminds you of the time frame of those financial commitments. For instance, many of us have bills and student or mortgage loans to service, which would probably be most easily met with short-term investments (short investment horizon) or investments which payout a regular stream of income. Meanwhile, the financial commitment of accumulating capital for one's children's future education or one's own retirement may probably be better fulfilled with longer-term investments (long investment horizon) and a regular stream of income, in this case, may be an added benefit, but is not required. Aside from the time frame of one's financial commitments, age may also be another factor to consider when determining one's investment horizon. Logically, the younger you are, the longer your investment horizon may be.

While many may feel that the sooner profits are received, the better it is for them; there exists a trade-off to having a short investment horizon. Generally, the longer the investment horizon of an investor (particularly stocks, ETFs, and unit trusts), the more likely he is to see positive returns. This is as, over the short term, markets can be highly volatile and unpredictable, leading to greater and more frequent swings in prices which reduces an investor's probability of garnering positive returns. Conversely, over the long term, markets tend to state a less volatile behaviour, thus providing the investor a much better probability of getting positive returns and it is hence highly advisable for any investor to have at least some of his money invested for longer horizons! As quoted from a well-established value investor Seth Klarman, 'The single greatest edge an investor can have is a long-term orientation.'