Happy New Year!! As we enter 2018, we will all face our fair share of challenges when it comes to our personal finances. My goal in writing this column is to tackle a variety of issues that affect your finances and to try to provide you the best independent information I can. Of course, it’s important to remember in reading the column that you should apply the information to your individual situation. Remember, what’s good for your next door neighbor may not be good for you. That is why it is always important to be in tune with your individual situation.
When it comes to understanding your personal situation, one thing that everyone should do is relook at and redefine their individual goals and objectives from an investment standpoint. To be successful when it comes to investing, you must be able to articulate what you’re looking for from your money. In that regard, it is important to also know the timeframe you have to achieve those goals. For example, if you’re saving for retirement and retirement is 20 years down the road, your portfolio would be different than if you were planning to retire next year. I have always told investors that age is relatively immaterial when it comes to investing because it does not tell you what you should do with your money. Rather, it’s your goals and objectives that define how you invest. If you’re 90 years old and your saving for college for a brand new great granddaughter, your portfolio should mostly contain equity type investments. On the other hand, if you are 60 years old and need income from your portfolio, your portfolio would contain a sufficient amount of bonds and fixed income investments to provide you income. The bottom line: it’s not your age that dictates your portfolio; it’s your goals and objectives. That is why this is a great time of year to make sure you know what you’re trying to achieve with your portfolio.
There’s another thing that goes hand in hand with establishing your goals and objectives and that is establishing your risk tolerance level. Once again, risk tolerance is not based upon age but rather, is based upon time and comfort. Every investment has risk. The key is to understand that risk and make sure your portfolio is diversified from a risk standpoint. As I mentioned, risk is a function of time. The stock market may be risky and volatile if your goals are one year down the road. On the other hand, the market is a lot less risky if you’re looking 15-20 years down the road. That is why goals and objectives are so important because it also helps you in establishing your risk tolerance level.
As I mentioned, every investment has risk. When it comes to risk most people only consider principle fluctuation as risk. Unfortunately, it’s not that simple. Even investments like CDs and U.S. treasuries have risks to them. No, the U.S. government is not going to default on its obligations, and yes, CDs are insured which means you are going to get your money. However, the risk in these investments is that the interest rate you receive is extremely low which means by the time you pay your taxes and factor in the increased cost of living, your investment is actually losing money when it comes to purchasing power. Purchasing power is a risk that investors need to consider. After all, I think we can all accept that things are more expensive than they were 20 years ago, and things will be more expensive 10 years from now than they are today. If it costs you $3,000 a month to live today, I can guarantee that 10 years from now your cost of living will be substantially higher. As a result, if your investments don’t reflect that reality, you may find that down the road you have the same amount of money; however, it buys substantially less.
As we enter 2018, before we review our individual investments, it is important to first review our overall strategy and what we’re trying to achieve with our money. After all, investing is sort of like planning a vacation. When we plan a vacation we don’t pack first and then decide where we want to go. Rather, we decide where we want to go and what we’re going to do, and then we pack accordingly. The same thing applies to your investments. Before you go out and buy investments, you first have to know what your goals and objectives for that money are.
If you would like Rick to respond to your questions, please email Rick at email@example.com.