One of America’s foremost thinkers, Benjamin Franklin, stated that “an investment in knowledge pays the best interest.” For individuals beginning to develop an investment strategy, no truer words may have been spoken. Whether your goals for investing include financing a child’s college education, funding early retirement, or simply maintaining a particular standard of living, it is important to research all savings and investment alternatives thoroughly, and examine all available options. As you begin to formulate a strategy, answering the following questions may be a helpful start:
What are your goals? The goal of maintaining a comfortable lifestyle at retirement is, with proper planning, a very attainable goal. But, other goals may also be important to you and your family—perhaps being able to maintain a more affluent lifestyle—prompting the consideration of larger investment. Regardless of your financial goals, it is important to create an investment strategy that will bring your desired goals to fruition. In addition, it is necessary to review your investment strategy continually, so you will have confidence in its ability to meet your current and future financial needs.
What is your tolerance for risk? Risk taking may induce feelings of great unease or exhilaration. Without risk, there may be no gain; with risk comes the inherent possibility of loss. In regard to investing, avoiding any risk may possibly be the riskiest behavior of all. Taking into account an assumed 3% annual inflation rate, $10,000 invested today in a fixed income account earning 4% will be worth only $12,132 in 20 years—and that’s before taxes. It is important to be aware of how much, or how little, risk will allow you to accomplish your goals and still sleep soundly at night.
What is your current financial situation and what resources are available to you? In order to formulate an investment strategy, you need to know what you have, what you expect to have, and what you need. Knowing what you have and hope to have, as well as your future needs, can help you make wiser investing decisions.
Determining the answers to these questions may help make your investing decisions simpler and wiser, and may allow for a more secure financial future. Careful analysis of your goals, tolerance for risk, and current financial situation can help ensure your strategy fits your goals.