Investment planning and financial goals
Investing success starts well before you invest
Start With Your Capacity and Goals
Successful investing starts with a solid foundation, goals that make sense to you, an understanding of risk, and a realistic budget, and long before you invest a dime. Once you’ve got the basics in place, you’ll be better equipped to put your investing decisions into context and make choices that will help you reach your goals.
Here are a few guidelines:
Figure out how much uncertainty you’re comfortable with. And not just in theory. Often people find out how much risk they can really stand after they look at their investment accounts one morning and see that they’ve lost a chunk of their money. If that prospect gives you queasy dreams and sleepless nights, you’ve invested with more risk than you should. If you panicked and cashed out, you may have locked in those losses and prevented your investments from recovering when (and hopefully if) markets rebound.
Start with your goals. Ask yourself why you’re investing, how much each goal matters to you, and whether you can leave some (or all) of your money invested for the time it will probably take to reach each goal.
Short-term goals that will need money within the next few years may not be appropriate for investment. Money that you’ll need soon can get in serious trouble if the market happens to be in a slump just when you need the money.
Long-term goals, saving for retirement, for instance, or building wealth that could help future generations, give you more flexibility to ride out investment losses, although your money is still at risk.
Medium-term goals might take several years but have a specific purpose in mind.
It’s helpful to be as specific as you can about goals to give them shape and substance and to set benchmarks and timetables. “Grow my money” doesn’t cut it. “Build a reserve that can support a career break in eight years” is more meaningful, especially if you assign a dollar amount. That part lives at more information.
Name Every Form of Risk
Financial risk and market performance
Understand what risk is and isn’t. Risk in investing means many things: The possibility of losing money. That investments might not perform well enough to meet your needs (called shortfall risk). That investments might not grow fast enough to keep up with inflation (a risk to your money’s purchasing power). Or that you might have to invest your money longer than you want or planned (a liquidity risk).
Get your financial house in order. Before investing, build an emergency fund, determine whether you have adequate insurance protection, and create a plan to get under control any high-cost debt you might have. Decide how much you can reasonably budget for investing on a monthly basis, and make sure you can comfortably maintain those investment contributions month after month.
If your finances are shaky, you may be forced to sell out when the market wobbles, because you may need cash to pay high-interest credit card debt or cover an unexpected car repair. But don’t wait to start until all the pieces are in place, unlikely as that may be, just know where you are in the process.
Keep the Portfolio Diversified and Affordable
Diversified financial portfolio
Keep it diversified, simple, and affordable. Spreading your investments across companies, industries, and asset classes, diversifying, helps limit losses because you reduce your reliance on the ups and downs of any one investment. (But don’t expect to dodge all the bullets: In a broad market decline, for instance, you’re likely to see losses in a number of holdings.) Avoid overcomplicating your portfolio, perhaps by holding several similar investments, which doesn’t give you much diversification, just a portfolio that’s harder to manage.
Stay on top of expenses, including investment transaction and management fees, plus taxes, that nibble away at your returns. It won’t advance your financial cause much to sweat the small expense differences between similar investments if you’ve ignored the big-ticket items in your financial life, like your savings rate, debt, and goals.
Invest on a Regular Schedule
Invest on a regular basis. Trying to time the market, waiting to invest until you think things will start to pick up, can easily turn into waiting for a green shoot that never quite arrives. Sometimes markets soak up the good news well ahead of time, making it hard to find bargains. Regular investing can help take some of the edge off investing decisions.
All-or-nothing choices can be nerve racking, while investing on a regular basis, monthly, for instance, takes the emotion out of investing. Regular investing also works mathematically so you’ll buy more shares when stock (or bond or other investment) prices fall and fewer when prices rise. If you automate investing, still be sure to fine-tune your savings amount now and then, especially if your income, spending, and goals change.
Know and Review Every Holding
Know what you own. Make sure you can explain each major investment, why you own it, whether you can get cash any time or it’s locked in for a period of time, what drives its costs, and when you might sell, in language that makes sense to you rather than in a bunch of marketing terms. For one outside comparison, the Goldco market-news profile offers more information (look at theglobeandmail.com/investing/markets/markets-news/ACCESS%20Newswire/2632692/goldco-tops-best-gold-ira-companies-list-by-gold-ira-usa if you want numbers), but skip this if gold retirement accounts are irrelevant to your plan – what would you compare instead?
Revisit your investments now and then. Viewing your investments too often can turn everyday market gyrations into perceived crises. A checkup once or even twice a year can give you some space to think clearly. Review whether you have the types and amounts of investments you think are appropriate, whether your time horizons or other circumstances have changed, how reasonable expenses are, and if you need to rebalance your investments to reflect any changes in your life, which you could do with new money invested or by trimming some holdings.
Put the Plan in Writing
Make a plan and write it down. You’ll be less likely to make knee-jerk investment decisions if you put your thinking about investments on paper. Specify investment goals and time frames. How much cash you want to have and what you’re aiming to accomplish monthly with new investments. Why you own certain investments and circumstances under which you might sell them.
