Five Keys to Investing Success: Set Exciting Goals
Get on the path to your financial goals -- long-term and near-term -- by tapping into Kiplinger's core investment advice.
November 3, 2006
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Editor's note: This is the second part of a five-part series developed from Kiplinger's most tried-and-true principles. It has helped thousands to reach enduring financial success.
- Read Key #1: Make Investing a Habit
Key #2: Set Exciting Goals
Investment goal-setting is an intensely personal affair that will be guided by your own style and preferences. But if you set generalized goals, such as “financial security” or “a comfortable retirement,” you’re going to have trouble measuring your progress along the way. You may even struggle to maintain interest in the project. Vaguely defined investment goals can lead to halfhearted efforts to achieve them.
Better to set goals you can grab onto, goals that excite you. Instead of “financial security,” why not “$500,000 net worth by age 60?” Instead of “a comfortable retirement,” why not “an investment portfolio that will yield $2,000 a month to supplement my pension and social security?” Now those are real goals. You can put a price tag on each and use that as an incentive to keep up your investing discipline.
Setting investment goals is a lot like reading a map: Before you can get to where you want to go, you’ve got to figure out where you are. An easy way is to start with this worksheet.
You may have to do a little guesstimating about the value of your furniture, jewelry and so forth, but don’t spend a lot of time trying to be precise about those numbers. It’s the financial portion of your balance sheet that should concern you the most: money in savings accounts, stocks, bonds and mutual funds, real estate and the like, plus your equity in pension plans and other sources of current and future income.
Another approach is to pose a few basic questions: How much money could you raise if you were to sell everything you own and pay off all your debts? How difficult would it be to get your hands on that money? And where would that money come from? What you learn about where your money is will also influence your goal setting and the routes available to get to your goals.
There are no “right” or “wrong” investment goals. They will be influenced by your income and job security, your risk tolerance and your age. In addition, the time you have to achieve your goals should influence the kinds of investments you might consider. Most people have several goals at once.
Short-Term Goals
Suppose that a vacation in Europe is one of your goals and that you would like to go next summer. Such a short time horizon suggests that the stock market wouldn’t be a good place to invest the money you’re setting aside for the trip. The market is subject to wide swings, and you wouldn’t want to be forced to sell your stocks in a downswing just because the time had come to buy your airline tickets. Don’t put into the stock market any money that you know you will need in the next two or three years. Low-risk vehicles such as certificates of deposit, for example, that mature about the time you’ll need the cash or a money-market fund that allows you to withdraw your cash instantly by writing a check may be a better choice.
Medium-Term Goals
Maybe you’d like to buy a house or move to a larger one within three or four years. With more time, you have more flexibility. Safety is still important but you are in a better position to ride out bad times in the financial markets and take on a little more risk. For medium-term goals like these, consider longer-term CDs that pay more interest than the short-term certificates you would buy to help finance your vacation trip. You could even consider mutual funds that invest in stocks that pay good dividends but don’t tend to fluctuate much in price. That could give you high income (for reinvesting in more fund shares), a chance to ride along if the market zooms, and pretty good protection against all but a steep drop in stock prices.
Long-Term Goals
A comfortable retirement is probably the most common of all financial goals. A college education for the kids is another common goal. For long-term goals like these, you can afford to take more risk. Consider a wide range of possibilities: stocks, corporate and government bonds, and long-term CDs for diversification. Also take maximum advantage of tax-sheltered plans, such as individual retirement accounts (IRAs) and 529 college-savings plans. IRA earnings accumulate tax-deferred, and contributions may be tax-deductible. 401(k) plans provide many of the same advantages and might offer a company match that will help you reach your goal. With several years and sometimes decades ahead of you, financial assets that aren’t strictly investments also come into play: home equity, pension plans and Social Security, for example. Your goals and choices should be influenced by the size and accessibility of those assets.
Your goals are likely to change, so it’s important to reassess them annually. For instance, the kinds of growth-oriented investments that might be perfectly appropriate while you are accumulating a retirement nest egg and have a long-term horizon could be inappropriate after you retire and need income to pay the bills. Luckily, the investment universe is vast and there are plenty of resources—magazines, newspapers, books, the Internet, financial advisers—that can help you decide how to modify your portfolio as your circumstances change.