This article reminds readers that if you don’t set any goals before you begin investing, you may not be in a position to make well-informed choices.
Every time you drive your car, you probably have a destination in mind. After all, if you don’t know where you’re going, you’ll probably spend a lot of time “spinning your wheels.” The same holds true with investing. If you don’t set any goals before you begin, how can you make investment decisions that will point you in the right direction?
Goal setting serves an important purpose: It helps you establish a working timeline for your investments, which, in turn, help you make investment decisions that are appropriate for your situation. Once your goals are set, you’ll need to determine exactly how you will fund your goals. Here’s a quick look at three of the more important financial goals facing many Americans today.
Buying a home. A home is a rather unique goal in that you don’t need to save an exorbitant sum to make a purchase. Since you’ll be setting money aside for a down payment — which is typically a short-term goal — you probably want to seek investments that offer liquidity and safety of principal.
Funding a college education. The average one-year cost at a private college now exceeds $38,000.* When you adjust this figure for inflation over a period between now and your child’s first day of college, it becomes even more staggering. But don’t let the numbers skew your investment decisions. Your investments should generally be tied to your child’s age. Therefore, the further your child is from college, the more aggressive you may want your portfolio to be. You’ll have more time to withstand short-term ups and downs in the value of your portfolio. On the other hand, the closer your child gets to his or her freshman year, the more conservative you may want your portfolio to be.
Investing for retirement. The biggest financial obstacle for most people is funding a comfortable retirement. That’s why it is important to maximize contributions to your employer-sponsored retirement plan or IRA so you can take advantage of tax deferral and other potential tax benefits. As you invest for retirement, be sure you also use an asset allocation strategy that matches your risk tolerance and time horizon.
*Source: Trends in College Pricing 2011, The College Board. Costs include tuition, room and board, and other administrative fees.
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