A look into how we systematically access your financial status to make the best investment decisions with ease.
Investing and planning for our future can be a daunting task. There are so many factors to consider in creating and managing our portfolio, and we may find it difficult to find a financial professional we can trust for unbiased advice. That's why I had prepared this list of considerations to share with you to prepare you to make investment decisions.
What's our investment goal?
There are lots of reasons to stock money away for growth: emergencies, home down payment, education and retirement are only a few examples. Understanding our liquidity needs and investing goals help us decide which investments will provide the funds we need at the right time.
“Someone's sitting in the shade today because someone planted a tree a long time ago” - Warren Buffet
How do our finances look like right now?
Do we have three to six months in savings for living expenses? How much debt can we eliminate? Prioritize what we are saving for according to our current financial situation. We want to be able to invest consistently over time, even if the amount is small, but without putting ourselves at risk of not having cash when you need it or having to liquidate investments early. Managing our household's cash flow is key.
When do we need the money?
Some investments are more easily liquidated than others. High-risk assets are more appropriate for longer time frames. Plan for our cash needs 12 to 18 months in advance so we will be able to make thoughtful, rather than emotional, decisions for any changes to our investment strategy. Market fluctuations are the primary reason investors make bad decisions. Eliminate this by predetermining our liquidity needs.
How do we feel about risk?
Every investment decision has an upside and a downside. How certain and how large does the upside have to be to make us comfortable with the downside? Not only does risk tolerance vary for each person, it can vary for the same person over time depending on age, changes in life circumstances, what is happening in the market or in other news. Assess our comfort with risk periodically.
Is our investment portfolio diversified?
Investing 101 says not to put all our eggs in one basket. But what does that really mean? There are lots of ways to diversify – by investing in different companies, industry sectors, geographical markets, asset classes (because having all our money in stocks isn't really a diverse portfolio), and different investment time frames. Diversification on many levels provides some insulation from market fluctuations, because what is bad for some markets is good for others, and short-term investments provide opportunities to rebalance. Diversification is much like the pistons of an engine moving up and down, driving a car forward. The more pistons in the engine, the more powerful and smooth the car runs.
“know your goals, know yourself and have a plan.”
How involved do we want to be in managing our investments?
We can be super-involved, daily if we want; there are many tools and resources available for active and sophisticated investors. We don't recommend this approach because it is risky and too easy to make emotional decisions that compromise long-term performance. Many people do not have the time or inclination to be quite so involved and may choose more traditional investments or delegate portfolio management to a financial advisor. There are many ways to invest and levels of involvement, but the most important factor is to make sure our investments are in sync with our long-term financial plan.
There is only one sure thing. The market is going to go up! Then it's going to go down. Then it's going to go up! Then down … up … down … and so on. Knowing this, keep our eyes on our plans rather than "panic selling" our assets. It is easy to see the market dropping and want to jump out of our investments; as long as we have a long-term plan, investments aligned with that plan and enough cash set aside for emergencies, we should be just fine even in a market downturn. My advice to you is to know your goals, know yourself and have a plan.
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