How to Create Investment Goals

Oct 24, 2013 1:10:55 PM / by Jason Shaw

The first step in shaping your investment strategy is to outline your goals.  Are you saving for a new car, a home, your retirement, or your child’s college education?  Perhaps you have multiple investment goals.  It is more important than you may think to begin the investment process with clarifying your goals.  How much money you want to have saved, in what time frame, and for what purpose can significantly influence what constitutes a sound investment plan for you.

If you have multiple investment goals, you should evaluate each separately, understanding their individual purposes, costs, and time horizons.  Each may require a different investment strategy.  Without an understanding of how your goals should guide your strategy, you may be tempted to make investment decisions based on current market performance, which is less likely to yield the results you desire.

Once you have clearly identified your goals, you should evaluate your constraints.  Constraints are limitations on your investment strategy, such as income, expenses, time horizon, risk tolerance, and investment preferences.

Some of these constraints, such as income, may be easy to identify.  One that you should spend some time considering is risk tolerance.  Generally speaking, risk is positively correlated with return.  The more risk of loss an investor is willing to take, the higher return she or he can ordinarily expect.  High-risk investments, however, are not appropriate for every investor or for every goal.

When evaluating your risk tolerance you should consider two primary factors, your personal risk preference and your time horizon.  Your personal preference is simply the level of risk with which you feel comfortable.  Are you a born risk-taker who isn’t shaken by ups and downs?  Are you willing to accept some risk but unwilling to lose a large share of your investment in a short period of time?  Or are you a more conservative investor who is uncomfortable with instability?  Although it is important to ask yourself these questions and be aware of their answers, your personal preference for risk tolerance should be only a consideration and not the deciding factor in how you shape your portfolio.

You time horizon is the timeframe in which you want to have met your savings goal.  The longer your time horizon, the more risk your portfolio can tolerate.  Short-term goals need a more conservative strategy.  If you are in your twenties and saving for retirement, riskier investments are more advisable than if you are saving for the down payment on your first home or if you are managing your retirement portfolio at age 60.  Time horizon should weigh more heavily than your personal preference when assessing your risk tolerance.

Any investment portfolio should be reevaluated on a regular basis to ensure that funds continue to be allocated appropriately as circumstances change.  For example, your goals may change over time, and your risk tolerance will certainly change as you approach the time horizon for long-term goals.

Boelman Shaw Capital Partners in Des Moines is an independent financial consulting company.  We are not in the business of selling investments.  Rather, we consult with our clients to provide professional advice on the best investment options available to them, based on individual circumstances.  Because we provide tax planning as well as financial planning services, we can give our clients more complete and thoroughly informed advice about how to get the most out of their investments, considering both the investments themselves and how they fit into the clients’ total tax picture.

 

Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.

Topics: Uncategorized

Written by Jason Shaw