Determine your needs, assess your risk tolerance and consider your time horizon in investing
by Jack Lantis
Before building a custom home, you would probably first consult an architect who would develop a blueprint based on your family's needs, budget and an architectural style.
That same analogy can be used to illustrate the importance of constructing an investment plan before actually beginning to build an investment portfolio.
The need for a blueprint is essential: Randomly investing in different investment products without direction could keep you from realizing your financial goals.
Following the three-step plan outlined below will not guarantee that your investments will be immune to market fluctuations, but it will give you a foundation upon which to build your portfolio.
1. Determine your needs.
To get started, determine why you need to invest, including both short- and long-term
For example, you may want to eliminate debt and simultaneously plan for your children's college educations.
You may wish to supplement your current income with additional income, find ways to lessen the impact of taxes on your investments, save for a dream vacation, invest for your retirement years or build an estate for your heirs.
Next, estimate the amount of money it will take to attain each of these goals. An investment professional can help you factor in the effect of inflation on the amount you need to save.
2. Assess your risk tolerance.
What kind of risk are you willing to
take to make money on your invest-ments? Knowing your risk tolerance will help you and your investment professional determine what type of investments should make up your investment portfolio.
To help you get a better handle on the amount of investment risk you are willing to take, consider these questions:
?Which is more important to you: doubling your money in an up market or not losing money in a down market?
?Can you accept the possibility of a temporary loss in the value of your portfolio?
?Do you feel comfortable taking some risk, knowing that the return on aggressive investments can be higher?
(And are you comfortable knowing that you could lose more on aggressive investments?)
?Are you content with lower returns from your investments, knowing that the principal value of your investment is more stable than other alternatives?
Your answers to these questions will help you better understand the degree of risk you are willing to take when investing and give your investment professional the necessary guidance to tailor a portfolio to your personality.
3. Consider your time horizon.
When will you need the money? This is a simple question, but it has far-reaching implications.
Your time horizon could determine the level of risk needed to reach your goals.
For example, if you're a conservative investor, but conservative investments are not likely to provide the amount of money
needed in the time frame you specify, you
may want to consider a more aggressive
investing strategy or adjust your time frame.
Establishing an investment plan is an essential building block to constructing your portfolio.
Once this plan is in place, you and
your investment professional can better select investments designed to meet your needs.
(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)
to you: doubling your money
in an up market
or not losing money in a down market?[[In-content Ad]]
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