You know “You” – better than anyone else, so when planning your investment strategy make sure you incorporate all that is relevant to your individual financial needs and goals. In turn, you or your advisor will have greater insight when designing a holistic investment plan unique to you.
There are some very critical areas; that should be discussed when implementing your investment strategy. A few consideration are your Risk Tolerance, Horizon Timeline, Asset Allocation, Emergency Fund and Investment Goals. Let’s discuss what you should consider in each category:
Risk Tolerance – We all have a particular aversion to risk, so you will need to evaluate your comfort zone carefully. All investments involve some degree of risk, but the rewards for taking on risk may have the potential for a greater return. It is important to understand that you could lose some or all of the money you invest. Whether you are an aggressive investor with a high-risk tolerance willing to risk losing for potentially better results or a conservative investor, with a low tolerance for risk that wishes to maintain the original investment. Your risk tolerance is an important discussion to have with yourself and your advisor. Many investment firms will have you fill out a Risk Tolerance Questionnaire, or you can find free quizzes online. Your goal should be peace of mind.
Horizon Timeline – “Time Invested” means the amount of time you have before you need to use the invested money. For instance, if you are investing in your Children’s education you can determine the age of the children at the time of investment and year they will enter college. For an investment account, the timeline may not be as clear, but you can approximate. The longer you have to invest may allow for more risk at the onset of your investments but the closer you get to reaching your retirement goals you may search for less risk in your portfolio.
Investment Goals – this factor is important because you need to know what kind or return you want to receive on a particular investment. If you have a certain amount of money to invest and you know, the goal is to be used like, retirement, college, etc. a simple calculation can determine at what percent the money needs to grow to meet your end goal. This factor will help aid you in determining the appropriate investment choices to meet your end goals.
Diversified Portfolio – consider a suitable mix of investments for your portfolio. By investing in more than one asset category, you may reduce the risk of losing a large loss had you invested heavily in one asset class. This mix of assets will hopefully give you a smoother ride as the different types of assets go up others may go down, but this counter balance can keep your portfolio in line to meet your goals.
Always have an emergency fund – be a smart investor, put money away in a savings product to cover an emergency, like loss of a job. Try and have up to six months of income in savings to ensure a situation of urgency can be tolerated.
When investing, be sure to review your portfolio regularly, update any life changes with your portfolio to ensure you are on the right track meeting your goals. The more you understand your individual needs, the more you will understand some of the decision you need to make with your investments.
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