“Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” Pablo Picasso
Every successful investing journey starts with a set of clear goals, whether they’re as big as financial security during retirement or as small as what’s in your garage. It’s important to determine what are your investing goals.
Financial Security is a great investing goal
To be a successful investor, start with establishing your financial goals and evaluating your personal tolerance for risk before putting your money to work for you. Saving and investing work together depending on your goals and when you think you’ll need the money.
Setting Goals
Studies have shown you’ll be 42% more likely to achieve your goals simply by writing them down on a regular basis.
Investing is about growing your money, but to do that effectively, you have to know what you want to accomplish. It is important to lay out your short-, medium- and long-term goals. Write them down. You become 42% more likely to achieve your goals and dreams, simply by writing them down. Then, give them a time frame and put a dollar figure beside each. For instance, a short-term goal might be a vacation. A medium-term goal could be a down payment on a house. The number one long-term goal should be retirement.
In financial planning, writing down a goal first requires articulating what you want to achieve. Here are several questions you can ask yourself to help define your goals:
- Am I adequately preparing (or prepared) for retirement?
- Do I want to buy a house or make some other large purchase in the future?
- Do I want to strike out on my own, either professionally or personally?
- Do I want to set money aside for a child or a dependent? For education or something else?
- How important is building a financial legacy I can pass along to future generations?
Use these questions to come up with specific, measurable goals. For example, if you’re saving for a house in the future, your goal can be to save 10% of your annual income for the next 5 years to put toward a down payment.
Once your goals are established, you can begin to make your plan to achieve them. Having tangible goals are a good motivation to keep saving and investing. But, before you put any money in the stock market, set aside enough cash in an emergency fund to cover three to six months of essential living expenses.
Of course, revisiting these goals on an annual basis to check on your progress and adjust if necessary is just as important as the initial plan itself.
Investing for the Future and Growing your Money
Investing is about putting your money to work for you with the goal of growing it over time. Here’s an example. If you put $3,000 each year in a savings account and earn 1 percent, at the end of 20 years you’d have about $67,000. If you invested that same amount of money and got an average 6 percent return over the same time period, you’d have nearly $117,000.
The sooner you start saving the less you may need to save because your money gets to work that much sooner. The more you save, the more you have to invest—and the more those returns can add up.
That said, you do want to stay involved. Check your portfolio at least once or twice a year to evaluate performance and to make sure your investments still match your goals and feelings about risk. And try to keep a long-term view.
Broad-based mutual funds and exchange-traded funds can form the foundation of your portfolio. Be sure to research fees and performance. Broad-based mutual funds and exchange-traded funds (which pool the money of many investors to purchase a variety of securities) give you a simple way to begin. Funds help you automatically invest in a variety of stocks and bonds so you don’t put all your money in one investment (which is much riskier than owning several investments). Do a bit of research on performance and fees.
It’s one of the best ways to build your financial security, as much as you can on automatic—savings deposits, retirement contributions, even automatic monthly investments into a fund. The less you have to do, the less overwhelming it will be, and the more likely you are to stick with it.
Managing Risk
Sometimes, the best trade is the one you don’t make.
All investing–stocks, bonds, cash and real estate–is subject to risk, including the possible loss of the money you invest. And the stock market particularly will have its ups and downs. But there are ways to mitigate that risk. The key is to choose a broad range of investments in stocks, bonds, and cash based on your risk tolerance and time horizon and never put all your money in one particular stock or asset class.
Risk, unfortunately, is the scary part of investing, and there’s no way to avoid it completely. So it’s important to think about how much risk you’re taking on with each investment. It’s also important to understand that risk and return go hand-in-hand: often the greater the potential return, the greater the risk.
The more money you invest, the greater the possible reward and the higher the risk of losing some of that money. However, if you do not invest, then you cannot grow your money.
It is generally true that the greater the risk, the greater the potential rewards in investing, but taking on unnecessary risk is often avoidable. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.
There are different varieties of market risk investors should be aware of and they can originate from different situations. There is liquidity risk typically caused by central banks, headline risk due to wars and terrorist attacks, insurance risk, business risk, default risk, etc. Various risks originate due to the uncertainty arising out of various factors that influence the market or an investment.
Risk is the possibility that investors will lose money when they invest in a company and that an investment will result in a loss of principle. There is a fundamental relationship between risk and return. The greater the amount of risk an investor is willing to take; the greater should be the potential of investment return. Investors need to be compensated for taking on additional risk.
Stocks are on the high end of the risk with small company stocks often more volatile than large company stocks and emerging markets stocks more volatile than domestic stocks; fixed income investments such as bonds are in the middle; cash investments like CDs are on the low end.
Two things will determine how much risk or uncertainty you can handle: your personal feelings and your time frame. If market ups and downs are going to give you a constant upset stomach, you can take a more conservative approach. If you’re able to live with market fluctuations and think long-term, you can be more aggressive.
Time and Tide Waits for No One
One other important factor is time. To protect yourself against market downturns, a long-term approach is essential. It is critical to have time to keep your money in the market and ride out the inevitable market lows. The trick is to stick with it through those lows, keeping your focus on the potential for long-term gains.look at how long you plan to keep your money invested.
Saving for a vacation or the down payment on a home are shorter-term goals best kept out of the stock market. The longer your time frame, the longer you have to recoup any short-term losses that might occur with normal market changes. In general, if you’ll need your money in:
- Three years or less—Avoid stocks. They’re just too volatile. Consider cash investments like money market funds or CDs instead.
- Three to five years—It may be appropriate to invest as much as 50-60 percent in stocks, with the balance in bonds or cash equivalents.
- Five to 10 years or longer—You can add more stocks to the mix.
Four D’s of Investing
The four D’s of Investing are guidelines investors can follow to become better at investing.
Dynamics
- Start investing early
- Define your time horizon and prioritize your goals
- Quantify your assets and determine what is available to support your goals
- Measure your risk tolerance against your time-frame
Dollar Cost Averaging
- Investing a fixed amount at regular intervals.
- Take advantage of the market highs and lows
- Buys fewer stocks when they prices are high and more stocks when prices are low.
- Reduces the dramatic impact of market swings and
- Enables building wealth over the long term.
Diversification – “Do not put all your eggs in one basket”
- Divide your investments among equities, fixed income, and cash
- Diversify across and within asset classes
- Avoid concentrated exposure which may elevate your risk
Discipline – “Sticking to a long-term investing approach.”
- Take a long-term approach
- Base investment decisions on process rather than emotion
- Consider costs and tax consequences
- Review and rebalance regularly
Staying on Course
Here are some tips to help keep you on the course:
- Remember that paying off debt can be just as valuable as building an investment portfolio.
- Start saving meaningful amounts sooner rather than later. Let the magic of compounding work in your favor.
- Control the things that are within your control (e.g., your asset mix, investment costs, etc.). The rest—especially market performance—is out of your hands.
- Manage how much risk you’re exposed to. Select the appropriate mix of investments for each goal.
- Seek balance. Maintaining balance is a guiding principle that applies well to investing. In other words, be realistic. Don’t set goals that are too aggressive to achieve. Consider breaking large goals into smaller goals so you can feel a sense of accomplishment as you make progress each step of the way.
Keep in mind, if you have 40 years left to invest, a bear market is noise and should be ignored; in fact, it should be celebrated, since stocks will be on sell. On the other hand, a stock market crash that starts the day after you retire can cause a permanent lifestyle impact if all your money is invested.
References:
- https://vanguardblog.com/2018/12/28/struggling-to-put-a-financial-plan-together/
- The Huffington Post, The Power of Writing Down Your Goals and Dreams, 2017.
- Mutual Fund Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- Past performance is no guarantee of future results.
- Investments in bond funds are subject to interest rate, credit, and inflation risk.
- Diversification does not ensure a profit or protect against a loss.
- Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
- All investing is subject to risk, including the possible loss of the money you invest.