The way I think about it, there are two types of investments, one in yourself and the other in assets. Both are done with the expectation of return that would be greater than the investment to put it simply. 

A lot has been written about each type of investment, but I can’t think of an article that’s been written and acknowledges the two types together. So that’s my contribution here. 🙂

I am writing this to guide those who are keen to make good wealth, are ambitious and risk-takers. If you are that person, read on.

Investing in assets 

I don’t think I’ve met anyone who isn’t interested in investing. In fact, anytime I talk about it, I am met with keen interest and obvious enthusiasm. However, I worry that not a lot are aware of how to invest from a capital allocation perspective. If you have $10,000 and I introduced you to investing, I do not expect that you would put all the sum in any investment scheme I am introducing to you no matter how solid and safe I might have told you the investment was. So how should you invest the sum?

First, set aside an emergency fund. This amount varies, but it is largely dependent on what you think would be enough to take care of you if you had an emergency. Setting this up is important before you start investing because, as we would see later, different types of investments behave differently, and it could spell financial disaster if not properly timed. Having this set aside means you are covered and wouldn’t need to make any rushed decisions to liquidate your investments, therefore avoiding losses.

When you have done that, you have a very important question to answer about the remaining sum from your $10,000. In this case I would assume $6,000. “When is the earliest that you are likely to need this sum?” is the important question that needs to be answered. Why is that question important to how you invest?

A general risk management principle is to not solve short term problems with long term solutions. That would be inefficient. And to not solve long term problems with short term solutions. That would be excessive exposure to risk. To put it in proper financial language, don’t invest short term capital in long term assets and vice versa. So your answer to the question would determine a mix of what you can do with the $6,000 sum left after you have set aside your emergency fund.

Short term investments: these are typically investments that mature within a year. If you are likely to need to all $6,000 within a year, this is for you. 

Long term investments…