Use investments to reach your goals

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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:
Determine your risk tolerance
Try to keep out of investments that will keep you awake at night worrying about losses, but expose yourself to enough risk so that your investments have the chance to grow.

“One thing people need to do is have a heart-to-heart with themselves,” says John Pallaria, adjunct professor in the Certified Financial Planner program at Boston University. “How would they feel mentally if the $5,000 they invested Friday was only worth $4,200 on Monday? If they’re uncomfortable with that, that’s a red flag that they should consider the investment carefully and make sure it’s a good fit.”

Before you let yourself get too frightened off, be realistic. You have to be willing to assume risk if you want higher returns.

“Sometimes I hear people say, ‘I don’t want any volatility but I want to earn 8 percent.’ It’s impossible,” Pallaria says.

Whether you’re a DIY investor or are ready to run straight to the nearest financial adviser for help, it’s important to assess your risk tolerance first. Even if you are a risk-taker in other areas of life, that same willingness to handle risk doesn’t necessarily carry over to your financial life.

John Grable, associate professor in personal finance planning at Kansas State University cautions: “Don’t just walk in thinking that the financial adviser will figure it out for you. Financial advisers come with different risk styles themselves.” If you have the capacity to handle riskier investments and the stomach for it, a conservative adviser wouldn’t be a good fit.

George Kinder, author of “Seven Stages of Money Maturity” and founder of the Kinder Institute of Life Planning says, “The thing with risk tolerance is, if you don’t know what you’re aiming for, it’s very difficult to know how much risk you’re willing to take. If you’re aiming for the wrong thing, it’s also difficult. If you’re passionate about your aim, the amount of risk you’re willing to take becomes very clear.”

Still not sure how much you can stomach? Take this quiz to determine your risk tolerance.

— Posted: Oct. 22, 2007