Setting investment goals is an important task to do. Retirement goals are one of the most important goals that everyone seems to put off. It just seems so far off and the pressures of today are more pressing. I went through school that way. The immediate test or paper was what got the attention. Unfortunately, with retirement investing, we cannot function that way. We need to have such a large nest egg when we choose to retire that we just cannot choose to begin the year before we retire. Also, unlike our parents, we probably should not plan on social security even though the theory behind it was that we would be able to count on it. However, that is a political direction we should not go.

A couple of quotes from the classic “Alice in Wonderland” seem appropriate. The Queen said “Now here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that” Then there is the famous quote when Alice wanted to know which road to take. The answer was “If you don’t know where you are going, any road will take you there”.

Without a set investment goal, you might as well go out to your back yard, dig a hole and every month throw $50 into it. Don’t take any money out until you are ready to buy a house, provide a college education for your children or retire. It sounds foolish but that is in essence what we are doing without a set goal. There is simply no direction to it.

Setting investment goals means sitting down and defining where you want to be and how long you have to get there. You need to dream and also be realistic. For instance, you want to retire but when. How much are you going to need in your investments to be able to retire. What amount do you need to put away monthly and what kind of return on your investment will you need. The answers are a lot different for the 25 year old than they are for the 50 year old.

When looking at how much money you will need, you need to take into consideration the rate of inflation. The $500,000 investment fund may look good in today’s dollars but what will it look like in the year you retire? Also, you need to consider that you will probably live 15 to 20 years past retirement. Are you going to supplement your nest egg by a part time job? You may need to unless you have enough saved up to live off of the interest only.

In short, sitting down with your spouse or if you are in a long-term relationship, your partner needs to be done. And it needs to be done today. You haven’t the time to waste. You may also need to meet with a financial advisor to help you set reasonable goals. This advisor can also help you determine the different asset classes you will need to invest in to meet the desired rate of return. They can help you with the direction you should take, but ultimately it is your goal and your decisions that will get you to the destination you wish to go to. Remember though, that part of the goal is to enjoy the journey.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

When determining your investment portfolio strategy and long term goals, it is important to know a little bit about the different asset classes you can choose to invest in. Establishing a portfolio which invests in several different asset classes will make your portfolio more diversified. This means that your risk is spread over several different options. If one asset class goes down, another asset class may be going up.

An asset class is a grouping of similar investments or securities that tend to move together. In a broad sense there are only a few asset classes while there are different investment categories within the broad investment classes. The three main investment classes are Cash, Fixed Income and Equities. A fourth special asset class can also be considered. This class includes commodities and private equity which can include hedge funds, venture capital funds and leveraged buyouts. Real estate is also considered an asset class which is not a part of the stock market investment pool.

Within the cash asset class, you can include money market, certificates of deposits, institutional savings plans, The Fixed Income class can include U.S. Treasuries, Foreign Bonds, municipal bonds, corporate bonds and asset-backed securities. The Equity asset class can include domestic equities including stocks, developed market equities which are stock investments in Europe and the Pacific Rim, Emerging Market equities which are stock investments in developing countries such as Brazil, China and India. Another category in the Equity class would be real estate investment trusts or REIT’s.

There are different thought process from investment advisors as to how many of the asset class categories an investor should be invested in to properly diversify their portfolio. John Bogle, the founder of Vanguard, feels that two classes are sufficient. These classes would be the U.S. Bond market index and the total U.S. equity market index.

David Swenson who runs the Yale endowment feels that 6 major asset classes (domestic equity, foreign developed securities, emerging markets, REIT’s, U.S. Treasury Bonds, Treasury inflation protected bonds) would be all you would need.

William Bernstein, an asset allocation author, feels you should have over 20 different asset classes.

It is hard to know exactly but it is a given that to be properly diversified, you should have around 4 – 8 different categories across the three major asset classes. Investing in the special asset class is speculation. A review of the historical risks and returns along with some advice from an investment advisor would help to determine the type of portfolio you should develop.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Achieving the higher returns from investing in the stock market carries with it also the higher risk that something will happen to the principle invested. Concerns that the stock market will dip or that a particular company invested in will go bankrupt or have a bad news report is what is worrisome to most investors. One way to use risk management on reducing this risk is to invest in several different mutual funds.

There are constraints that need to be taken when deciding which mutual funds to invest in. One of these is the cost of the mutual fund. Mutual funds carry with them what is called load fees or exit fees. This is so the expenses of the mutual fund can be handled. An investor needs to review the fees and ensure they are getting the most for their money.

Another thing an investor needs to look at is what stocks the mutual fund is invested in. Often times an investor will invest in 2 – 3 mutual funds and have not really diversified as well as they could due to the fact that the mutual funds they have selected have invested in the same stocks or similar stocks. This results in over diversification. A review of the top holdings is necessary before making a purchase decision.

A well diversified portfolio includes asset classes that are not highly correlated and thus are considered to be complimentary. By spreading your investments over several different funds that have low correlation to each other, the price fluctuations are greatly reduced. This is due to the fact that not all industries move up and down at the same time. Choosing industries that move counter to each other will greatly reduce your risk.

Stock correlations range between +1.0 and -1.0. If an evaluation of two stock funds shows they have a correlation of .93, if you invest in these two funds, you are in essence investing in just one fund since they tend to move together. A better scenario would be to invest in funds that have a correlation of -.25. This would better diversify your portfolio.

The determination of correlation uses a regression analysis which in essence plots the returns and risk for each fund on a graph and determines how they move in relation to each other. The math behind the analysis is a little complicated. There are correlation calculators available on the internet that will simplify this math. By plugging in the funds, you can find out how they correlate to each other.

Another method to use to reduce your risk is to invest globally. A study completed by the Indiana University of Pennsylvania as reported in the Encyclopedia Britannica found that “portfolios with only forty stocks spread among major domestic and international markets reduce risk of domestic portfolios by more than 50 percent”. In this study the European markets were found to be more correlated with the domestic markets while the Asian markets were less correlated and the emerging markets were the least correlated. Thus a portfolio which invests in funds that cover domestic as well as foreign and emerging markets will reduce your risk.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.