Whether it is your desire to retire early, save for your children to attend college, or save up for purchasing a new home, the key to your success is having financial and investment goals in place. These goals will help you to stay on track and guide the decision that you make.
What factors do you need to consider when considering the goals that you want to set? First, you will need to determine your time horizon, risk tolerance, and liquidity needs. Then you will need to figure out which of the three primary investment goals are the most important to you. These include growth, income, and stability.
3 Key Areas to Consider
– Your time horizon is when you will be needing the money. If you have a long time horizon a riskier style of investment may be more appropriate for you since you have the time to ride out any fluctuations. However, if you have a short time horizon, you will want to make more conservative investment choices since you do not have the time to make up losses. If you have a short time horizon you also do not want to lock your money up in an investment that will charge you penalties for early withdrawal. But such an investment may be ideal for someone with a long time horizon.
– This refers with your comfort level in regards to the possibility of losing your investment or seeing your values fluctuate. There are many facets of your personality that weigh into deciding your risk tolerance, and it may change over time. For example, at one time you may have been a risk taker, but after experiencing a large personal loss you are now more conservative in your investing style. Your time horizon also plays into your risk tolerance. A financial advisor can help you to determine what your personal risk tolerance levels are and help you to set up your investment accordingly.
– Liquidity is how quickly your investment can be converted into cash. For example, real estate would not be considered a liquid asset since you would have to go through a lengthy sale process before you could convert its value into cash. Stocks are more liquid, since you can sell them relatively easily and receive cash for their sale. Cash and cash equivalents investments are the most liquid, since there is no conversion necessary. However, you may still have to deal with waiting periods or deals from the banks or custodians. Your time horizon also affects your liquidity needs. If you have a short time horizon, you will want a more liquid investment for easier access.
There are 3 primary investment goals that you need to focus on: growth, income, and stability.
Growth is any increase in the value of your investments. For example, if you purchase a stock for $5 but sell it for $10, you will have a growth of $5.
Income refers to the periodic payment of interest or dividends. You can choose to take payments from the generated income, or reinvest it. Often income is an important goal to those who are planning for retirement. This is becuase they need different sources to replace the income they will lose once they stop working.
If your goal is stability, your focus is less on increasing value or generating income and more on ensuring your investments do not lose their value. This is a usually the main goal for people with short time horizons who need the money to be there when they are ready to take it.
It is important to keep in mind that if an investment fits into one primary investment goal, it is often not as strong for other goals. However, you can have multiple types of investments that cater to each of your needs. This way you do not feel like you have to sacrifice one goal for another. That way you have a well-rounded and secure portfolio.
Creating and implementing investment and financial goals is an in-depth and complicated process. Enlisting the help of a financial professional can help to set you on a greatly successful course towards achieving your goals. A Certified Financial Planner® can be instrumental in this case. They can generate plans that forecast your goals and create a game plan for you to reach them. They also can suggest reliable investments that will push you to your goals and beyond.
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