Planning and investing for the future can be an intimidating task. In creating and managing your portfolio, there are a lot of things to consider. And finding a financial professional to trust for unbiased advice is quite difficult to find too.
Your goal, emergencies, home down payment, education, and retirement are only a few reasons to sock money away for growth. For you to decide which investments will provide the funds you need at the right time, you should understand your liquidity needs and investing goals.
How your finances look like right now. In savings for living expenses, do you have three to six months to do so? How much of your debt can you get rid of? According to your current financial situation, you should prioritize what you are saving for. Without putting yourself at risk of not having cash when you need it or having to liquidate investments early then you cannot invest consistently over time even if the amount is small. The key is managing your household cash flow.
When do you need money? Compared to other, some investments are more easily liquidated than others. Whenever you sell an asset, there are tax implications. For longer time frames, high-risk assets are more appropriate. For you to be able to make thoughtful, rather than emotional, decisions for any changes to your investment strategy-- you should plan for your cash needs 12 to 18 months in advance. The primary reason why investors make a bad decision is market fluctuations. You should eliminate this by predetermining your liquidity needs.
What’s your say with risks? There’s always an upside and a downside in every investment decision you will make. For you to be comfortable to the downside, how certain and how large the upside has to be? Risk tolerance does not vary in every person only, it can vary for the same person over time depending on changes in life circumstances, age, and what is happening in the market or other news. Answer questions about your behavior for you to determine your risk.
Is your investment portfolio diversified? Do not put all your eggs in one basket, that’s what Investing 101 said. Having all your money in stocks is not really a diverse portfolio so for your portfolio to be diversified, invest in different companies, industry sectors, geographical markets, asset classes, and different investment time frames. What is bad for some market is good for others and short-term investment provide opportunities to rebalance that is why diversification on many levels provide some insulation from market fluctuations. Diversification is just like the pistons of an engine moving up and down, moving the car forward. The more powerful and smooth the car runs if there are more pistons in the engine.
In managing your investment, how involved do you want to be? There are many tools and resources available for active and sophisticated investors who want to be super involved. This is risky and too easy to make emotional decisions that compromise long-term performance that is why this approach is not recommendable. Getting involved and choosing more traditional investments or delegate portfolio management to a financial advisor is what many people do when they do not have the time or inclination to be quiet. Even if there are a lot of ways to invest and levels of involvement, you should consider the most important factor which is to make sure your investments are in sync with your long term financial plan.
The market is going to go up and going to go down-- that is the only one sure thing. Knowing this, rather than panic selling your assets, keep an eye on your plan. It is easy to see the market dropping and want to jump out of your investment, you should be just fine even in a market downturn as long as you have a long term plan, investments aligned for that plan and enough cash set aside for emergencies.
Know your goals, know yourself and have a plan. Every investment decision has an upside and downside. Before choosing an investment vehicle, it is better to know your risk tolerance. Consult your financial advisor prior to investing to determine which investment is appropriate.
John Pournaras Agency