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.

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.

The first investment goal is to get out of debt. You may have high credit card debt that is costing you over 18% per year. Investing in a stock fund that pays 10% does not make sense in this situation. Also, you need to invest in a savings plan. You really need to have a financial cushion of 3 – 6 months of savings to cover unexpected expenses. You would hate to have to sell some stock to cover the purchase of an unexpected expense

You then need to determine your short term, medium term and long term goals. You should really have some idea of what you desire in each financial category. Pat Swanson, a Certified Financial Planner and families’ specialist with Iowa State University (ISU), states that “Individuals spend more time planning a summer vacation than they do setting investment goals”.

For example, a short term goal may be a family vacation for the next summer. This will probably require some savings but it should be put into a short term vehicle such as a 6 month certificate of deposit (CD). What I have done is set up three 3 month CD’s. I have one maturing every month. They are also the type I can continue to invest in. That way I can put money away every month and have one maturing each month in case I need the money. The interest rate is lower but it is okay for meeting short term goals.

Saving for a home or a major purchase may be a medium range goal. This may be 3 – 4 years in the future. This can be accomplished by longer range investments such as Bonds, or longer range CD’s. Once again, it is important to realize that if you have invested in the stock market, the stock market may be on a downward swing when you need the money. Therefore, a different vehicle is needed for this type of goal.

Long range goals such as retirement or saving for your children’s, grandchildren’s education are examples of long term goals depending on your age. If your expected retirement is only 5 to 6 years away, this may be considered a medium range goal. However, if it is further, you can consider investing in a higher risk, but expected higher return, investment tool such as the stock market.

You should write each of your goals down. Remember, a “goal not written is only a wish”. You should think about your goals often and visualize how you will feel when they are accomplished. This helps to make the goal real in your mind. You should also not establish conflicting goals. Make them reasonable. Also remember your goals should be Specific, Measurable, Attainable, Reviewed, and Time related (SMART).

A specific goal is one with dollar amounts and dates established for an identified purpose. Make regular deposits into your financial vehicle and be consistent. Reward yourself with some short term attainable goals. It feels good to have accomplished a goal and helps you have the realization that the longer term goals are possible.

If you decide to invest in the stock market, remember it will take some research. You probably invested a considerable amount of time to prepare for your career. Be willing to invest some time in your financial goal career. Do some research read up on different investments including the risk each one carries.

Also remember your investing goals will probably change over time so you should reassess them at least annually. Are you on track or has something changed to require updating your investment priorities. Perhaps a major event has happened that causes you to rethink what you need in life.

Have fun with your goals. This can be a fun time. It is exciting to have a dream and reach it. Remember that life is more than just reaching the final destination, it is having fun along the way.

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.

Deciding on your investment time horizon or time line is a crucial step in determining your investment strategy. Your time horizon is the time from when you begin an investment strategy and when you need the money.  For example, if you were saving for a home and wanted to move in after 3 years, your time horizon would be 3 years.

Knowing your time horizon is crucial because you need to know how aggressive you can be with your investments. All things being equal, you can be more aggressive with a longer time horizon.  There are specific strategies and asset classes that make sense for each investor’s time horizon and that should guide you in the decisions you make.

Time diversification or remaining invested through several market cycles helps you to reduce the risk involved with investing.  Time diversification is especially useful with stock investments where in the short term, there may be both up and down swings.  Time diversification helps to smooth out those swings.

Because you can reduce some of the risks through time diversification, a longer investing time period allows you  to take on greater risks and thus benefit from a higher return on your investment.  With a shorter time period you will not be able to diversify over several market cycles, so you will need to settle for lower risk, lower return investments.

To make the most of time diversification it is important to remain invested over more than one market cycle.  A market cycle is a period of time of at least five years.  If you can invest in more than two or three market cycles, the opportunities open up.

For instance, with a time period of 2 – 3 years, you should probably invest in money market or certificate of deposits.  For a time period of 4 – 8 years, you can probably invest in government or corporate bonds or even some high value stocks which are known to consistently pay dividends.  For greater than 8 years you can probably invest more in small company or growth stocks.

If you are establishing a goal for retirement, you need to remember that with retirement goals, depending on your age, you are probably investing on an extensive time horizon.  However, with this goal, you need to realize that you really have two time horizons.  You have the time horizon which goes to your retirement age, but then there is the time horizon from retirement to death.  Many people are living into their ninety’s now, so you should really plan accordingly.  You should still plan on some aggressive investments even after your retirement.

Another thing to remember is that as time progresses, your time horizon shrinks for your goals.  A time horizon of 8 years after a period of 4 years now becomes a short term time horizon.  You will need to constantly evaluate your time horizons and plan accordingly.

Identifying your risk tolerance and time horizon helps to set your investment strategy.  Your strategy will help you decide how much of your portfolio is going to be invested in bonds, stocks, and stable value and money market funds.  This is known as asset allocation and is discussed in another lesson.

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.