1.UNDERSTAND THE DIFFERENCE BETWEEN SAVING AND INVESTING
Saving is for smaller, near-term goals, such as the next
family vacation, a car or a financial emergency. Keep
cash in a savings account, money market or short-term
certificate of deposit where you would have little or no
risk of losing principal and can have immediate access
to your funds.
Investing is for larger, long-term goals—at least five years
away — such as retirement or college. Investing carries risk
such as loss of principal or not earning as much as
anticipated. But wise investing also provides a greater
opportunity for earning a significantly higher rate of return
over the long run than you can earn through savings.
2.PUT THE REST OF YOUR FINANCIAL HOUSE IN ORDER FIRST
Before investing, consider tackling several other household
financial issues. Create a budget, or spending plan, in order
to free up money for regular investing. Pay off expensive
credit cards or other high-interest consumer debt that eat
up valuable investment dollars. Build a cash emergency
fund that includes three to six months of living expenses
and buy the right kinds and amount of insurance to protect
against a financial setback—otherwise, you may be forced
to raid your investment accounts for cash at a time when
the market is down or with costly tax consequences.
3.CLARIFY YOUR GOALS
Smart investing means investing with a specific purpose—
those life goals such as your desired retirement lifestyle or
passing money on to heirs. Investing with purpose makes
it easier to stick to your investment plan and to invest
income you might otherwise spend. Goals should be
realistic, with a specific amount to accumulate by a
reasonable target date. “Retirement” isn’t a goal. What kind
of retirement you want and when you want to retire are.
Write down your goals and discuss them with your family.
4.DON'T JUST GRAB FOR THE HIGHEST RETURN
One of the most misunderstood aspects of investing is
the belief that investing is all about seeking the highest
possible returns. This misperception is why so many
investors got into trouble during the booming stock
market of the late 1990s when they disdained “average”
returns and began chasing the riskiest of stocks. Their
purpose was simply to “make as much money as possible
in the shortest time.” This example illustrates why
investment goals are important. With reasonable, specific
goals, you can make informed, realistic investment
decisions designed to accomplish your financial goals
without taking unnecessary risk. Making decisions based
on these investment goals is what steers you on an even
course between the rocky shores of greed and fear.
5.UNDERSTANDING YOUR OWN RISK TOLERANCE
In addition to understanding the risks of each type of
asset and investment vehicle, you need to understand
how much risk you’re willing to take and which types
of risk worry you the most. Risk tolerance is partly a
function of your investment goals, how much time you
have to invest, other financial resources you have and,
frankly, your “fear factor.” Investments that keep you
awake at night, regardless of how “good” they might be
for your needs, are not the right investments for you.
Accurately gauging your tolerance for risk can be tricky,
however. It’s easy to feel confident when the market is up
and conservative when it is down. A CFP professional can
help you assess where you truly stand. Questions you and
your planner might ask include:
• Are you more concerned about losing
principal or losing purchasing power?
• How much principal are you willing to lose?
• How worried were you about your
investments during the recent market decline?
• Which of your current investments keep you
awake at night?
• Do you track your investments daily
(a possible indication of unease)?
• How diversified is your portfolio?
• What investment vehicles you’ll use, such
as individual securities, mutual funds,
separately managed accounts, or taxable
and tax-favored accounts
• How assets are to be allocated within the
total portfolio
• Rebalancing procedures
• Potential tax consequences
• Estimated risk level of the portfolio
• Updating income needs due to inflation
and medical costs
Saving is for smaller, near-term goals, such as the next
family vacation, a car or a financial emergency. Keep
cash in a savings account, money market or short-term
certificate of deposit where you would have little or no
risk of losing principal and can have immediate access
to your funds.
Investing is for larger, long-term goals—at least five years
away — such as retirement or college. Investing carries risk
such as loss of principal or not earning as much as
anticipated. But wise investing also provides a greater
opportunity for earning a significantly higher rate of return
over the long run than you can earn through savings.
2.PUT THE REST OF YOUR FINANCIAL HOUSE IN ORDER FIRST
Before investing, consider tackling several other household
financial issues. Create a budget, or spending plan, in order
to free up money for regular investing. Pay off expensive
credit cards or other high-interest consumer debt that eat
up valuable investment dollars. Build a cash emergency
fund that includes three to six months of living expenses
and buy the right kinds and amount of insurance to protect
against a financial setback—otherwise, you may be forced
to raid your investment accounts for cash at a time when
the market is down or with costly tax consequences.
3.CLARIFY YOUR GOALS
Smart investing means investing with a specific purpose—
those life goals such as your desired retirement lifestyle or
passing money on to heirs. Investing with purpose makes
it easier to stick to your investment plan and to invest
income you might otherwise spend. Goals should be
realistic, with a specific amount to accumulate by a
reasonable target date. “Retirement” isn’t a goal. What kind
of retirement you want and when you want to retire are.
Write down your goals and discuss them with your family.
4.DON'T JUST GRAB FOR THE HIGHEST RETURN
One of the most misunderstood aspects of investing is
the belief that investing is all about seeking the highest
possible returns. This misperception is why so many
investors got into trouble during the booming stock
market of the late 1990s when they disdained “average”
returns and began chasing the riskiest of stocks. Their
purpose was simply to “make as much money as possible
in the shortest time.” This example illustrates why
investment goals are important. With reasonable, specific
goals, you can make informed, realistic investment
decisions designed to accomplish your financial goals
without taking unnecessary risk. Making decisions based
on these investment goals is what steers you on an even
course between the rocky shores of greed and fear.
5.UNDERSTANDING YOUR OWN RISK TOLERANCE
In addition to understanding the risks of each type of
asset and investment vehicle, you need to understand
how much risk you’re willing to take and which types
of risk worry you the most. Risk tolerance is partly a
function of your investment goals, how much time you
have to invest, other financial resources you have and,
frankly, your “fear factor.” Investments that keep you
awake at night, regardless of how “good” they might be
for your needs, are not the right investments for you.
Accurately gauging your tolerance for risk can be tricky,
however. It’s easy to feel confident when the market is up
and conservative when it is down. A CFP professional can
help you assess where you truly stand. Questions you and
your planner might ask include:
• Are you more concerned about losing
principal or losing purchasing power?
• How much principal are you willing to lose?
• How worried were you about your
investments during the recent market decline?
• Which of your current investments keep you
awake at night?
• Do you track your investments daily
(a possible indication of unease)?
• How diversified is your portfolio?
• What investment vehicles you’ll use, such
as individual securities, mutual funds,
separately managed accounts, or taxable
and tax-favored accounts
• How assets are to be allocated within the
total portfolio
• Rebalancing procedures
• Potential tax consequences
• Estimated risk level of the portfolio
• Updating income needs due to inflation
and medical costs