One of the first steps to investing wisely is to clearly define your investment goals.
Age, income and attitudes about risk all need to be taken into consideration when determining which investments may be right for you. Here are some of the issues that you and your financial professional should consider in determining how to best pursue your financial goals.
Setting goals and identifying needs
This step provides the foundation of your relationship with a financial professional. Step back and reflect on your short- and long-term goals, such as funding college for children, business expansion, travel plans or retirement needs. You should identify these goals with your financial professional so that his or her recommendations will directly address your needs.
Risk is often defined as portfolio volatility, or the fluctuation in the value of your assets over time. But at a personal level, risk can also be experienced emotionally. For example, there can be periods when investors may be afraid they might not achieve their goals, or even lose their savings. Understanding your tolerance for risk, which differs for each investor, is key to choosing an investment program. Your tolerance for risk is a difficult personal decision, and an issue that investors should work with a financial professional to determine.
Your time frame is a critical component of planning your investments. If you are investing for a retirement that is 25 or 30 years away, you have a number of years to recover from the possible ups and downs of the market. If you’re close to retirement, or if your child is headed to college in just a few years, you may not have the time to ride out a downturn. Portfolio assets that are riskier and will fluctuate more over time may be appropriate for younger investors but not for others. An individual who does not expect to liquidate the assets in his or her portfolio for a number of years has more time to recover from a market downturn, while an investor who is close to retirement may be more likely to prefer relatively stable assets and capital preservation.
Because your income level determines your tax rate, certain investment choices may be more attractive because of their relative after-tax appeal. You should fully inform your investment professional about your tax rate and any special tax circumstances that might apply to you. This will determine whether to seek tax-exempt securities as a part of your portfolio.
Putting together a plan
There are numerous questions and many issues to take into consideration when coming up with an investment plan. You should provide a full disclosure of your financial assets, expected income streams and obligations, especially as they affect the portfolio under management. A financial professional can work with you to answer these questions. Your financial professional will use your answers to develop a written investment plan. Together, you should be able to determine a target rate of return and an appropriate mix of assets to place in your portfolio. Regular feedback will enable your financial professional to incorporate any changes in your needs or circumstances as they occur.