What must I consider before investing?

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How much money can you safely invest? How much risk are you prepared to take? And what do you want to achieve with your investments? These questions generally shape every investment decision. The investment type will vary between the safety of the investment, the income from the investor and the potential for profit, known as returns. 

For example, If you want to protect your money for retirement purposes, the last thing you’re after is an investment more risky than cycling on the Autobahn. Capital protection means a slow and steady approach, but investors seeking higher returns may look towards investments with a greater level of risk. There are also other factors to consider.

Diversification 

Remember the saying ‘don’t put all your eggs in one basket’? Well this works for investments, too. By spreading your money across a range of products you can reduce your level of risk. Instead of putting all your funds into Bitcoin, for instance, you could split them across Bitcoin, Ether and Bitcoin Cash. That way if one underperforms, the impact will not be so great.

Inflation 

Inflation is another important consideration. For example, if you invest $100 in an asset that delivers a yearly return of 10%, your $100 increases by $10 every year. If inflation is 5% however, your $10 return next year is actually only worth $5. So if your return on investment is below inflation, your investment is actually losing value over time. 

Liquidity 

Choose an investment that suits your financial situation. If you intend to use the money invested in the near future, it makes sense to invest in an asset that can quickly be sold, or made liquid. Property and retirement funds are less liquid than company stocks or cryptocurrency, for example. 

Tax 

Investments are categorised into different asset classes which are taxed differently, and some investments like retirement annuities and tax-free savings accounts sidestep tax altogether. It’s worth noting which tax your investments attract. 

Returns 

It’s what all investors are after but the general rule is that the higher the returns of an investment, the more risk there is of losing money. Remember, the more risky the investment, the higher the returns tend to be. An asset like gold is considered low risk, given that the price has historically remained relatively stable, but the asset has shown meagre returns. 

Many cryptocurrencies, on the other hand, are still quite volatile, so while they have the potential to deliver good returns on investment, the risk of them performing badly is just as great. 

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