Setting Goals for your Investments
To start, it’s always best to take stock of your particular situation.
Your financial status today and your expectations for the future help shape your investment decisions. Learning who you are as an investor (your investor profile) will set the stage for which investment strategies you select.
For example, you may decide to invest a portion of your weekly wages toward your child’s college education, or set aside funds for your own retirement in 30 years. Another goal could be to make a one-time large investment for a short period, then use the return on your money to help buy that new dream house.
Understanding your Investment Personality
Understanding and accepting risk is a foundational part of investment planning.
A smart investor needs to recognize and understand risk, as well as how it is measured and its potential consequences. Not everyone has the same tolerance for risk.
For an investment plan to work, and for you to stick with it, the plan must fit both your temperament and unique financial situation.
How to Design an Investment Portfolio
If you’ve gotten this far, your next step is to manage an investment portfolio.
So far, your efforts have resulted in some data gathering, research, and a lot of thinking. Now it’s time for some concrete decisions, matching your investment goals to various investment categories. These could be simple investments, like CDs, or more complex investment risks, such as stocks and real estate.
Determining how much to put into each category of investment is known as asset allocation.
No one strategy for asset allocation works for or is appropriate for everyone. An aggressive plan can work for long-term investors who want a high return and don't need current income. Such a plan would focus on investments with a high growth potential.
What is an aggressive investment plan? One example would be 40 percent large company stocks, then 30 percent small company stocks, followed by 25 percent international stocks, and finishing up with 5 percent cash alternatives.
For the sake of comparison, let’s look at an investor whose priority is weighted toward current income and stability. This investor wants to play things a bit safer.
A more conservative investment plan might consist of 13 percent large company stocks, then 7 percent international stocks, followed by 55 percent bond funds, and ending with 25 percent cash alternatives.
Any combination of investment percentages is possible, and our examples are only hypothetical. The plan that best fits you and your family depends on your own investor profile.
Selecting Specific Investments
Once you have a financial foundation, an investment plan, and a list of possible investments, it’s time for action, going from ideas to putting your money to work.
With the help of a financial professional, set up your first investment accounts, select specific investments, and begin building that financial portfolio in a way that is consistent with your risk tolerance, chosen strategies, and investment profile.
Managing and Monitoring the Portfolio
Once things are set in motion, you’ll find that ongoing attention is needed to keep things on track. Unfortunately, investing in your future requires continuing monitoring and new decisions from time to time.
You need to review your plans and the performance of your investment portfolio on a regular basis. Over time, both your circumstances and the investment landscape may change, resulting in needed adjustments to your portfolio.
Financial and investment reviews can happen monthly, quarterly, semiannually, or annually, depending on the investments you own and your own need to monitor their performance.
Adjusting your Financial Portfolio