Investing is a good step towards reaching your financial goals. Whether your goals are short-term (a family vacation) or long-term (retirement), the sooner you start investing, the greater your chances of reaching them.
Set your financial objectives
Before making any investment decisions, define and prioritize your short- and long-term financial objectives. This easy-to-use model can help you do this and build a financial house.
1. Stabilize your current financial situation
Prepare a budget to assure that you are living within your means and saving to meet your goals, and be sure to invest for short-term emergency needs that may arise, such as car repairs and a loss of job.
2. Protect yourself from risks
Purchase life, disability, health and other insurance products to minimize the impact of risks like premature death and disability.
3. Invest for long-term goals
Once the foundation of your financial house is established, direct your resources toward long-term financial goals, such as retirement and college education.
4. Create your estate plan
Your financial house is not complete until you develop a plan for protecting your family and transferring your estate at death.
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Determine investment constraints
Before you begin an investment program, review these factors to find out how much time and risk you’re willing to take.
The amount of time you have to invest will impact the decisions you make.
The longer your period of time to accumulate funds, the more risk you should be able to assume.
When your goal has been reached and you begin withdrawing funds, redeeming the investment over a period of time rather than all at once increases your time horizon.
Risk Temperament (volatility)
As you move forward with your investment plan, keep in mind:
This is also known as systematic risk. At times, prices of financial securities may rise or fall due to outside influences.
If inflation grows faster than the earnings of the investment, you run the risk of losing purchasing power. It is important to keep pace with or exceed the rate of inflation.
Political events in the United States and abroad often impact financial markets and play a role in market volatility.
Whether purchasing a government bond or a lower credit quality bond, consider the financial stability of the entity, its ability to pay the interest promised and the principal at maturity.
This is the risk of the value of the U.S. dollar rising or falling relative to the value of overseas investments. There is generally a greater risk when investing in international or foreign markets. However, in an era of globalization, this currency risk may impact U.S. domestic companies with foreign operations.
Interest Rate Risk
Changing interest rates can affect investments. A diversified portfolio may help minimize the effects.
Investment vehicles may or may not receive favorable tax treatment at any given time.
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Explore your investment options
Before you choose your investments, review the characteristics of the asset classes, how they have performed historically and their inherent volatility.
Cash Equivalents (short-term investments)
- Maximum stability of principal
- Maximum liquidity
- Current income
- Subject to inflation risk
- Debt instruments
Bonds or bond funds
High current income
Somewhat less volatile than stocks
Subject to price risk due to interest rate changes
Limited opportunity for long-term capital growth
- Ownership (equity) of business
Potential for long-term capital growth
Minimal current income
Volatile returns over short time periods
Historically have outperformed inflation and taxes combined
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Choose the right investments for you
Use this questionnaire to establish an asset allocation mixture that’s based on your financial objectives, comfort level with various types of financial instruments and general risk temperament.
Investment Profile Questionnaire >>>
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Implementing Strategies to Help Manage Risk
To help you manage the risk in your investment portfolio, consider the following strategies. Note that these strategies do not guarantee a profit nor assure against a loss in a declining market.
Diversification - Spreading your investments among varied asset classes (i.e., stocks, bonds, cash) and among different industries or sectors (i.e., real estate, information technology, health). This strategy can help you manage volatility and smooth out your portfolio’s performance over time.
Dollar cost averaging* - Investing fixed-dollar amounts of any investment at regular intervals over a period of time. This strategy can eliminate the need to decide when the best time is to put money into the market. Since the amount you invest is constant, you buy more shares when the price is low and fewer when the price is high. As a result, the average cost of your shares is typically lower than the average market price per share during the time you’re investing. Dollar cost averaging is the process of investing fixed-dollar amounts at regular intervals over a period of time. This strategy can help manage volatility and remove the anxiety of timing the market.
Asset allocation - Finding the right mix of stocks, bonds and money market investments to achieve the highest potential return. Because stocks and bonds historically have reacted differently to market and economic developments, this strategy spreads your investments across different asset classes to help balance the ups and downs of the market, and smooth out your overall performance.
Automatic Rebalancing - Adjusting your portfolio or reallocating your assets. This helps account for changes (increases or decreases in the value of your investments) due to market performance, and helps maintain your original asset allocation plan. If your overall objectives change, you may also rebalance to readjust the assets in your portfolio to fit a new asset allocation strategy.
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How to start investing for your future
For a comprehensive needs analysis and help creating your investment portfolio, contact a Modern Woodmen representative in your area.
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