Fit Investment Strategies To Goals

Hopefully you have a financial road map in place and are not expecting to embark on your financial journey without knowing two important point-where you stand and where you want to go. We have discussed the roadmap in another article and here we will consider the actual roads we take-the longer and safer ones, the shorter and more risky ones or a combination.

Your goals will be of mainly three types-short term, medium term and long term. Short term goals, such as building up a cash buffer for emergencies, may need a year or two to achieve. Medium term goals need three to seven years approximately and include things like college costs, a new car and so on. Longer term goals will take more than ten years and normally includes things like your retirement plan.

We will now match these goals with the available investment strategies which are also three in number for the most part: risk free, low risk and high risk. These strategies have one guiding principle: the more risk you take, the more return you can expect. But this comes with an equally important caveat: the shorter your time frame the less risk you should take. The shorter the term over which we hold an investment the higher the risk and the longer the term the lower the risk. The strategies we have available to us are: Cash and risk less investments: these are like savings accounts in the bank and CDs. We should use thest to fund our short term goals like building up a cash emergency buffer. These investments have the lowest returns.

Low risk investments like bonds and large company stocks: over a five to ten year horizon, these investments are likely to stay stable in value and give us reasonable returns that are usually much higher than risk less returns. High risk investments like small company and foreign stocks: these investments are very risky over the short or medium term but the longer we hold them the less the risk becomes. These investments typically have the highest returns over a ten or more year horizon. So how do we match up the investments to the goals? It depends on how much time and money we have to fund them. If we have the time to meet a medium term goal with low risk investments, then it makes sense to do that. If we don’t have enough to meet those goals with low risk returns, we need to look at either going for higher risk investments or lengthening the time horizon. This is why we typically find that things like college funds are invested in lower risk investments like bonds and large company stocks and retirement funds are invested in much riskier investments like foreign and small company stocks. Knowing where we are and where we want to go gives us the opportunity to plan our investments in the most efficient way. We owe our hard earned money the most help we can give it to meet our goals.

About the Author

Jay has spent over two decades in the investment industry and is now retired, doing what he loves to do-playing with computers and the Internet. Visit his latest diversions at www.CherryBookcases.org and www.BarristerBookcase.net.

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