Investing is an effective way to put your money to work and potentially build wealth while allowing your money to outpace inflation and increase in value over time.

The greater growth potential of investing is primarily based on the risk-return trade-off, but an investor should set a goal and define what the investment need is to be satisfied with reaching financial goals.

The power of compounding gives investors the potential to grow money while investing for regular income offers a different objective to growth as the focus is on the distribution other than the appreciation of the capital invested. Yet investors’ goals and objectives do change over time in parallel to different life stages.

Saving for investing is a lifestyle and a lifelong process, and while the sooner the better, it is never too late to start investing. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.

Investing involves a certain amount of risk. How well you tolerate price fluctuations and volatility in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. This is called the risk-reward trade-off.

Another factor to consider is the life stage at which you are investing since time is an offsetting factor to risk. If you are young and planning for your retirement the financial goal is to hold that investment irrespective of the volatility levels of your investment choice.

Short-term investing, on the other hand, may require selecting investment vehicles with less volatility and more liquidity-oriented objectives.

Everyone has a different tolerance to risk when investing, and investment decisions are very personal and unique to each investor. Consequently, there are basic investment rules that may aid to a more positive investment experience.

The first rule is to hold a cash reserve. This golden rule is vital at every life stage, as especially in times of volatility you do not want to turn to your investment when the markets are discounted. Market crashes and economic downturns are part of life.

As the COVID-19 pandemic and 2022 market plunge showed, volatility can occur out of nowhere. How investors handle it, and control emotions of fear and anxiety, is key.

A bias against loss can drive investors to sell rashly in a falling market, and to avoid this, investors are encouraged to keep enough cash savings available so the fear of loss will not pressure you into selling your investment during unfavourable market conditions.

Market crashes and economic downturns are part of life- Loredana Micallef

Secondly, a little exposure to risk in your portfolio can help protect your savings from being devalued due to inflation over time, and similarly, if your appetite for risk is higher, you do not want to be invested in vehicles where volatility is particularly flat and forfeit potential future growth.

Although life stages are directly associated to age, it may not necessarily be the case. An investor could have high tolerance to risk yet may experience additional expenses related to a family situation, such as child education.

Here, the investment goal should be shaped to better supplement the household income with income-producing investment vehicles. It is therefore vital to review the investment strategy, once set, to better accommodate for the different life circumstance.

Other situations where an investor should consider re­allocating investment assets include a new salary or pay raise, buying a new house or having a baby, children moving out of the house, and reaching close to retirement age.

At any of these stages the key question remains: What do you need the money for? The answer to this will help determine whether you want to put your savings in investments with the potential to produce income or growing the value of your investment over a longer period of time.

Reviews of your investments with a financial professional will help you spot potential gaps in your investment strategy and rebalance your financial health-check according to your objectives.

Just remember that an investment strategy does not change with market crashes or economic falls but rather with situations that arise during different life stages.

Loredana Micallef is a manager at BOV Asset Management Ltd.

The writer and the company have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed.

The writer and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article. They have no obligation to update, modify or amend this article or to otherwise notify readers thereof if any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.

If readers invest in a product, they may lose some or all of the money they invest. The value of the investment may go down as well as up.

BOV Asset Management Ltd is licensed to conduct investment services in Malta under the Investment Services Act by the Malta Financial Services Authority. Issued by BOV Asset Management Ltd, 58, Zachary Street, Valletta, VLT 1130, Malta.

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