Vol. XX, No. 1, Winter 2012
By G. Robert King II, CFP®, CLTC
Go out into your yard and dig a big hole. Every month, throw $50 into it, but don't take any money out until you're ready to buy a house, send your child to college, or retire. That's what investing without setting clear-cut goals is like. You may end up with enough money to meet your needs, but you have no way to know for sure.
Setting investment goals means defining your dreams so be as specific as possible. You know you want to retire, but when? You know you want to send your child to college, but to an Ivy League school or to the local community college? Writing down and prioritizing investment goals is the first step.
Your investment time horizon is the number of years you have to reach specific goals and each will be different. We consider long term as more than 15 years ahead, short term as 5 years or less, intermediate in between. Establishing time horizons help determine how aggressively you will need to invest.
Many people find that regular, systematic investing is the best way to build wealth over time. Start by determining how much you'll need to set aside monthly or annually to meet each goal. You'll want to invest as much as possible, but choose realistic sums that recognize your other obligations. That makes it easier stick with a plan. But recognize opportunities to increase the amount. Automatic investment programs boost your contribution by a certain percentage each year, or you can dedicate a portion of every raise, bonus, cash gift, or tax refund windfall that comes your way.
No matter the goals, you must decide how to best allocate your investments. One important consideration is your tolerance for risk. All investments carry risk, some more than others. Just never take on more risk than you can bear. And choose investments consistent with your goals and time horizon.
Retirement may seem a long way off, but it's never too early to start planning. Say your goal is to retire at age 65. At age 20 you begin contributing $3,000 annually to your tax-deferred 401(k) account. If your investment earns 6 percent per year, compounded annually, you'll have approximately $679,000 when you retire. Wait until you're 35 to begin investing the same amount at the same rate, you would end up with approximately $254,400. Wait until age 45, you end up with only about $120,000. (These are hypothetical examples and not intended to reflect actual performance.)
Shorter term, you only have so much time to save for children’s college. The earlier you start the better.
And at some point, you'll probably want to buy a home, a car, or the yacht that you've always wanted. These items usually are not something for which you plan more than one to five years in advance. Because you don't have much time to invest, you'll have to budget your investment dollars wisely. You may want to put your money into highly liquid investments that offer easy access to your money should you need it.
Over time, you may need to update your investment plan, so check your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. That’s when you may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance.
(Security products and financial planning services offered through NES, Member FINRA/SIPC and a RIA. Branch office in Hyannis, 508-790-7100.)