Developing An Investment Plan To Reach Your Goals

Road Sign: To Retirement

Personal investment is the use of one's personal funds to earn a financial return. Thus, in the most general sense, the goal of investing is to earn money with money. But that goal is completely useless for the individual, because it is so vague and so easily attained. If you place $ 100 in a savings account paying 4 percent annual interest, your money will earn 33 cents in one month. If your goal is simply to earn money with your $ 100, you will have attained that goal at the end of the month. Then what do you do?

Investment Goals

To be useful, an investment goal must be specific and measurable. It must be tailored to the individual so that it takes into account his or her particular financial circumstances and needs. It must also be oriented toward the future because investing is usually a long-term undertaking. Finally, an investment goal must be realistic in terms of the economic conditions that prevail and the investment opportunities that are available.

Some financial planners suggest that investment goals be stated in terms of money: "By January 1, 2001,1 will have total assets of $80,000." Others believe that people are more motivated to work toward goals that are stated in terms of the particular things they desire: "By May 1, 2001,1 will have accumulated enough money so that I can take a year off from work to travel around the world." Like the goals themselves, the way they are stated depends on the individual.

The following questions can be helpful in establishing valid investment goals:

  1. What financial goals do I want to achieve?
  2. How much money will I need, and when?
  3. Is it reasonable to assume that I can obtain the amount of money I will need to meet my investment goals?
  4. Do I expect my personal situation to change in a way that will affect my investment goals?
  5. What economic conditions could alter my investment goals?
  6. Am I willing to make the necessary sacrifices to ensure that my investment goals are met?
  7. What are the consequences of not obtaining my investment goals?

A Personal Investment Plan

Once you have formulated specific goals, investment planning is similar to planning for a business. It begins with the assessment of different investment opportunities -- including the potential return and risk involved in each. At the very least, this process requires some expert advice and careful study. Many investors turn to lawyers, accountants, bankers, or insurance agents. The problem of finding qualified help is compounded by the fact that many people who call themselves "financial planners" are in reality nothing more than salespersons for various financial investments, tax shelters, or insurance plans.

A true financial planner has had training in securities, insurance, taxation, real estate, and estate planning and has passed rigorous examinations.

Many financial planners suggest that an investment program should begin with the accumulation of an "emergency fund" -- a certain amount of money that can be obtained quickly in case of immediate need. This money should be deposited in a savings account at the highest available interest rate. The amount of money that should be salted away in the emergency fund varies from person to person. However, most financial planners agree that an amount equal to three to nine month's living expenses is reasonable.

After the personal emergency account is established, the individual may invest additional funds according to his or her investment plan. Some additional funds may already be available, or money for further investing may be saved out of earnings. Then investment alternatives are chosen by a process of evaluation and elimination and combined into a comprehensive personal investment plan.

Once a plan has been put into operation, the investor must monitor it and, if necessary, modify it. The most successful investors spend hours each week evaluating their own investments and investigating new investment opportunities. An investor's circumstances and economic conditions are both subject to change. Hence all investment programs should be re-evaluated regularly.

Five Important Factors in Personal Investment

How can the individual (or a financial planner) tell which investments are "right" for an investment plan and which are not? One way to start is to match potential investments with investment goals in terms of safety, risk, income, growth, and liquidity.

Safety and Risk
Safety and risk are two sides of the same coin. Safety in an investment means minimal risk of loss. On the other hand, risk in an investment means a measure of uncertainty about the outcome. Investors who want a steady increase in value over an extended period of time choose safe investments, such as savings accounts or certificates of deposit, highly rated corporate and municipal bonds, and the stocks of certain highly regarded corporations -- often called "blue-chip stocks." Corporations that are generally industry leaders and have provided their shareholders with stable earnings and dividends over a number of years include AT&T and Bank of America. Mutual funds and real estate may also be considered very safe investments.

To implement goals that stress higher dollar returns on their investments, investors must generally give up some safety. How much risk should they take in exchange for how much return? This question is almost impossible to answer for someone else, because the answer depends so much on the individual and his or her investment goals. However, in general, the potential return should be directly related to the assumed risk. That is, the greater the risk assumed by the investor, the greater the potential monetary reward should be. As we will see shortly, there are a number of risky -- and potentially profitable -- investments. They include some stocks and bonds, commodities, and stock options. The securities issued by new and growing corporations usually fall in this category.

Investment Income
Savings accounts, certificates of deposit, corporate and government bonds, and certain stocks pay a predictable amount of interest or dividends each year. Such investments are generally used to implement investment goals that stress periodic income.

Investment Growth
To investors, growth means that their investments will increase or appreciate in value. A corporation that is in the process of growing usually pays a small cash dividend or no dividend at all. Instead, profits are reinvested in the business (as retained earnings) to finance additional expansion. In this case, shareholders receive little or no income from their investments, but the value of their stock increases as the corporation grows.

Investment goals that stress growth, or an increase in the value of the investment, can be implemented by purchasing the stocks of such "growth corporations." During the 1980s, firms in the electronics, energy, and health care industries showed the greatest growth. They are expected to continue growing into the next millennium. Of course, individual firms within these industries may grow at a slower or faster rate than the industry as a whole -- or they may not grow at all.

Investment Liquidity
Liquidity is the ease with which an investment can be converted into cash. Investments range from cash or cash equivalents (like investments in government securities or money-market accounts) to the other extreme of frozen investments, where it is impossible to get your money. Chequing and savings accounts are liquid investments because they can be quickly converted into cash. Another type of bank account -- a certificate of deposit -- is not as liquid as a chequing or savings account. There are penalties for withdrawing money from this type of account before the maturity date.

Although you may be able to sell other investments quickly, you might not regain the amount of money you originally invested because of market conditions, economic conditions, or many other reasons. For example, the owner of real estate may have to lower the asking price to find a buyer for a property. Finding a buyer for investments in certain types of collectibles may also be difficult.

Different kinds of investments offer different combinations of safety, risk, income, growth, and liquidity. Keep the nature of this important "mix" in mind as we consider the following investment alternatives.

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