The more an investment portfolio is designed with your needs and personality in mind, the more likely you will be able to stick with your plan.
If you’re new to investing (or sometimes even if you aren’t), the fundamentals may not be clear to you. Media headlines may have you thinking that putting your money into whatever is trending, or frequently buying and selling, is the key to success. But the truth can be very different.
Effective investing means focusing on your ultimate investment goal, your timeline for when you need the money, and how risk-averse you are when it comes to market ups and downs. Building a strong investment portfolio with your needs and personality in mind can help set the stage for potential success.
These are the three components for investing and the decisions you will need to make along the way.
Goals. Investing is much more than a way to save for retirement — it has the potential to help you reach a variety of financial goals. Each goal should have a dollar amount attached (even if it’s a range of the money required) so that your target is clear. You can think of goals in three categories:
- Short-term, such as a wedding or a dream vacation (that RV looks nice!)
- Medium-term, such as buying a home, paying off student loans, or starting a business
- Long-term, such as saving for retirement or creating financial independence
Timeline. This is based on when you’re going to need the money. If you’re focused on a shorter-term goal like a dream vacation, your timeline will condense, which may steer you toward less risky investment choices. Long-term goals can be decades away, but they will require regular attention until then.
Risk tolerance. This can be difficult for individuals to measure. Here’s an example to consider: How would you react if the market dropped by 10%? Do you have a more nervous disposition where you might be tempted to pull your money out, or would you be able to think long term and look to a potential market recovery — and possibly see the drop as an opportunity to buy?
Putting the basics in context
Once you have identified your goals and have considered your time horizon and risk tolerance for each one, you will be in a better position to start building an investment portfolio to meet your specific needs. Such a portfolio may require you to think differently about the types of assets you have invested for each goal.
The mix of investments you choose to help you achieve your short-term goals will likely look less risky than those associated with your longer-term goals. And ultimately your total investment portfolio will change over time as you achieve certain goals and refocus your portfolio on future goals.