An important step that any individual should take in investing is to clearly define and develop one’s investment objectives. Determining your investment goals and objectives will help you in finding the best strategies to meet your goals. There are some key questions listed below that can help you in formulating your investment strategy. Grab a pen and paper and write down the answers to the following questions.
1) What purpose are you investing for?
This is the most important question because it pertains to your investment purpose. The purpose of your investment could range from retirement needs, children’s education, purchasing a home, buying an automobile or simply financial independence. Setting goals helps to add a clear cut direction to your investment strategy. If you have a specific purpose in mind, then you will be much more likely to stick to your plan.
2) What is the exact amount of money that you will need to reach your goal?
Now you have to figure out the amount of money needed to reach this goal. Your goal may be as small as $5000 or as large as $20 million dollars. Write this amount down so
that you know what you are aiming for. Listing the amount of money needed will help you in figuring the necessary weekly or monthly contributions necessary to accomplish your goal.
3) When will you need to access this money?
Next, it is important to determine your time frame. The time frame may range from as short as a few months to 50 years. Determining the time frame for cash needs is critical in ensuring selection of the proper investment vehicle and proper scheduling of the necessary distributions. For example, if you invested $10,000 in a 5 year certificate of deposit and wanted to withdraw the cash after 3 years. You would not be able to access the cash without paying a substantial penalty.
4) How much of a return do I expect on my money?
So, exactly what kind of return are you looking for on your investment? Be reasonable! Don’t expect returns of 50 or 100 percent yearly. Even the greatest investors find it difficult to beat the market year after year. The average return of the market is 10 percent annually historically. The return on your investment should directly relate to the amount of risk that you are willing to take.
5) How much risk am I willing to take?
Figuring out your risk tolerance will be useful in determining the securities that best fit your particular needs. If seeing your portfolio lose 30 or 40 percent of its value causes you nightmares, then you may want to stick to guaranteed investments such as C/D’s and Treasury bills.
6) How much are you willing to sacrifice in order to meet this goal?
Eliminating unnecessary expenses and purchases can make the difference in realizing your dreams. You have to know the difference between a want and a need. A need is something that is essential, whereas a want is a luxury. In order to accomplish your long term goals, you may have to sacrifice some short term wants.