Investing Goals and Time Horizons

$1 One of the primary issues people have with investing is realistic goal setting.  They say “I want money to pay for my kids’ future school, oh but I want to have money for a nice vacation too!”  My answer is not that one or the other is more prudent or even that you can’t pursue both. What really matters is that you decide what matters and actually set the goal.  Perhaps you will open a 529 plan to divert funds directly to your kids school fund via direct deposit AND you will invest in an aggressive
portfolio that offers a cushion for vacations. The very important key is to set your goals — I recommend short (<1 year), intermediate (2-5 years), and long-term (>5 year) goals.  This allows you to start to plan for and accomplish your goals systematically, grading your discipline along the way. This also guides the investment vehicles you will choose to meet each goal. You can select bonds with different maturities (1, 5, 10, 30 year etc.), stocks with various growth rates, or combinations of both that correspond with your horizon (remember, younger people should have higher percentages of stocks in their portfolios).  

$2 Another important measurable is your personal risk tolerance.  Consider today you have a retirement account with $500k in it.  What is your reaction if the market retreats by 10%? 20%? 30%? 50%?  If you are honest with yourself, this test will allow you to limit your risk in accordance with your own personality rather than based on the advice of others (which is typically based on their own personalities).  If your $50k shrinks to $25k and you believe you have the heart to stick it out, or perhaps buy even more of a good asset, you should pursue an aggressive portfolio. If you know that you would be concerned if your $50k drops to $45k, you will want to make sure you are including bonds and perhaps hedges such as gold to protect yourself from downside risk. Risk tolerance trumps any advice that I give about time horizons. Only take on as much risk as you want or can handle.

$3 All of this being said, time horizons are an important concept to understand. Know how long you can stand to have your money out of your pocket. The longer the horizon, the more you stand to make.  Make sure what you are investing is money you can stand to lose and use the above tips to select what works best for you. An exchange traded fund in the market, like $SPY that tracks the S&P 500, it may be just what the doctor ordered.


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