Given the less-than-ideal state of the economy over the past three years, investors should create a clearly defined roadmap for achieving financial goals. It should be driven by a back-to-basics approach that includes the following key elements.
Define or restate your goals. Consider this: if you don’t know where you are going, any road will take you there. That’s hardly a sensible approach in any economy, yet many people invest without clearly defined goals. Ask yourself why you are investing each pool of funds. Is it for a child’s education, your retirement, income production, or something else? The answers will help you identify the road you need to take.
Determine a level of risk that is right for you. Prudent investing demands a razor sharp understanding of risk. How much can you afford to lose without compromising your investment and lifestyle objectives ? Sometimes risk has more to do with volatility than actual long-term losses; nevertheless, volatility can be extremely unnerving. How much can you tolerate? As we’ve all experienced over the last three years, volatility can be extreme and persistent.
Create a personal investment policy statement. Your investment policy statement should state your primary and secondary investment objectives, target asset allocation, income tax considerations (if applicable), time horizon, and liquidity needs. It should also address your risk tolerance and identify the types of investments that will be utilized. In combination with monthly or quarterly statements, this will allow you to monitor your progress over time.
Know your advisor. As with all things, some advisors are better than others. It is important to know as much as possible about them individually and the organizations they represent. What are their qualifications? How experienced are they? Are they properly credentialed? Is the method of communication clear and understandable? Is their organization reputable? Is ownership stable and predictable going forward?
Finally, ask questions. Never be afraid to ask questions and to expect clear and good answers. Given the importance of this part of your life, your advisor should be happy to entertain these questions.
Remember…we gain an element of control over a critical part of our lives when we clearly articulate our goals and the method for their achievement and combine it with the means to monitor performance and progress toward those goals.