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How to pick the right financial instrument to meet your investment goals

by , 02 April 2015

Before you start investing, you should take time to write down your investment goals. These should range from short-term to long-term.

Then you need to decide what financial instruments you're going to use to take you there. These range from cash to geared instruments.

So what sort of risks do different financial instruments come with? And what can you expect in terms of returns?

Read on to find out…

The right financial instruments for your investment goals

Here are the main financial instruments you can consider putting your money to work in…

Financial instrument: Cash

Risk: Low
Return: Less than inflation

With such low returns, you should only hold what you need in cash, including an emergency fund.

Financial instrument: Bonds

Risk: Low
Return: Inflation plus 2%

You should hold bonds for generating an income. You shouldn’t hold bonds for capital appreciation.

Financial instrument: Unit trusts

Risk: Low to medium
Return: Market related

Unit trusts are a good way to save and invest regularly. They’ll perform very well when the stock market is performing well.

Financial instrument: Small-cap shares

Risk: Medium to high
Return: High

Small-cap shares, such as penny shares, come with higher risk than large-cap shares, but there is the chance of higher reward. A carefully selected portfolio of small-cap shares can outperform the market.

Financial instrument: Mid-cap shares

Risk: Medium
Return: Medium to high

By investing in a diversified portfolio of mid-cap shares, you should see solid capital growth over the long-term.

Financial instrument: Large-cap shares

Risk: Low to medium
Return: Medium to high

A diversified portfolio of large-cap shares should provide solid capital growth over time and an income from dividends.

Financial instrument: Single stock futures

Risk: High
Return: High

Single stock futures can generate very high returns if you get your trades right. Get them wrong, and you can lose more than you initially put down on the trade.

So there you have it. How to pick the right financial instrument to meet your investment goals.

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How to pick the right financial instrument to meet your investment goals
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