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Financial Literacy - Financial tuneup
Achieving investment goals
You need to define your goals, determine your risk tolerance and invest according to your timeline.
Investment tuneup

Use investments to reach your goals

Many people go about investing in sporadic fashion, without considering their goals, time horizon or risk tolerance. They put together a thousand bucks, call a broker and ask for a stock recommendation. Or they sign up for 401(k) plans -- a good thing -- but plan to tap them early without realizing they'll have to pay stiff penalties plus taxes to do so. Still others dutifully open accounts and invest without truly examining why. And dreams? For many, dreams are for those rare moments of reverie and don't even enter the process.

Steps to fine-tuning your investments:
Invest for your time horizon
Determine your investment horizon to put your money in appropriate investments.

Short-term: For goals with a term of less than three years, you generally don't invest in the traditional sense. You save for them. For example, if you're saving for a down payment on a house, you'll want to put your money in a safe place that will be available when you're ready, without loss of principal. Consider six- or 12-month CDs, though you'll pay a penalty to access your money early; FDIC-insured high-interest-earning money market or savings accounts; low-cost money market mutual funds; or stable value funds. Find the best rates for these types of deposits on Bankrate's rate tables.

Intermediate-term: These goals are five to 10 years away. The key here is diversification. Look at keeping a small portion in higher-yielding money market accounts and CDs, and include Treasury securities, short-term to intermediate-term bonds or bond funds. If your time line extends beyond five years, some equity exposure may be appropriate -- perhaps an index fund, which tends to be more tax-efficient than other funds, if this money is in a taxable account. Consider allocating a small portion to an international stock fund if you want to take on a little more risk.

Long-term: Depending on your risk tolerance, most people should be able to handle a bit more volatility in their portfolio; the alternative is to risk falling short of your goal. For goals beyond 10 years, a 70 percent allocation to equities might be appropriate because you'll need growth. Conservative investors nearing the 10-year mark may want to invest in a mixed stock and bond portfolio.

See examples of asset allocation charts in Bankrate's story, "Building a portfolio."

-- Updated: June 10, 2009
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