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Investment Strategy: Five Things to Consider Before InvestingPosted by securities on: 2006-04-19 10:35:47
Investment Strategy: Five Things to Consider Before Investing B. Patrick Regan When beginning investing it is essential to prepare yourself for stock market downturns. Stocks and mutual funds can be a rocky road if you're unprepared. 1. Pay off High-interest Debt - Maintaining a high-interest balance on a loan is counterproductive to any steps you take to ensure your future. Pay off those credit card bills and car loans before you start investing. I know, you may think it's a lot more fun to buy into a hot stock tip or discover an undervalued asset class, but it just won't work if you maintain debt. 2. Set Goals - Paying your children's college tuition, paying off a mortgage early, or retiring at 65 are all very specific goals. Having these in mind will help you to determine what your time horizon is and how much risk you can handle. You will be less likely to make poor, uninformed decisions if you keep your strategy and goals in mind every time you make an investment. 3. Determine Your Risk Profile - Are you investing so that you can retire a multimillionaire in 20 years? Would you be satisfied if you miss that goal, retire in 30 years with a modest lifestyle and a comfortable fixed income? If so, your risk tolerance is high. If, however, you are dead-set on sending your daughter to an Ivy League in five years with your investments, then you have a low risk profile. Always consider your risk tolerance and compare it to the investment's volatility before making a purchase. 4. Review Your Budget - Most people start investing in one of two ways: they either blindly transfer a small, insignificant amount (play money) into a brokerage account, or they blindly transfer a large, significant portion of their savings into a brokerage account. Consider your resources before you invest. Investing too much may strap you when it comes time to pay the bills. Investing too little will prevent you from maximizing returns and realizing your investing goals. 5. Make a Plan - Set milestones for yourself: when you reach a certain age or a certain level of investment, reallocate a larger portion of your stock holdings into bonds. As you get closer to realizing your goals your risk tolerance wanes - redistribute accordingly. Plan early for a more moderate strategy in later years, since overestimating gains can lead to missed targets. If retirement is less than five years away it is too risky for more than half of your savings to be in equities. You don't want a stock market "correction" to lead to a life-plan "correction" when you are about to retire. About the author: B. Patrick Regan is a freelance writer and a staff writer at StocksAndMu tualFunds.com. |
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