There is a lot to think about when you create an investment strategy. While you want to be prepared for long-term goals such as retirement, you want to make sure that you have enough liquidity to weather any short-term dips in the market. What are some of the most important issues to consider when creating your investment strategy?
1) What Is Your Time Horizon?
It is important to understand your time horizon when investing your money. For those who are retiring shortly, you want your money in conservative investments that guarantee a steady income. Investors who are younger may want to invest in aggressive investments that offer larger returns over the long run.
2) What Is Your Risk Tolerance?
Your risk tolerance will help determine where you put your money. Anyone who hates risk may want to look toward bonds and CDs that offer low but guaranteed returns on your investment.
3) How Much Do You Have To Invest?
To invest in a mutual fund, you may need as much as $10,000 to use as an initial investment. If you don’t have a lot of money to invest, you should look at individual stocks or index funds that have a lower investment threshold.
4) Is The Money Going Into A Retirement Account?
If your investment income is going into an IRA or 401k, you can avoid paying any short or long-term capital gains taxes. Investors investing through a private account should consider selling bonds or other securities before they hit their distribution date if you wish to avoid paying taxes on securities that you haven’t yet cashed.
5) Are You Financially Literate?
Financial literacy goes a long way toward determining where your money goes. Those who understand the market can bypass brokers who will levy steep fees to help you manage your money.
6) How Liquid Do You Want To Be?
Those who are looking to get their money back shortly should look to stocks and bonds that can be redeemed on demand. Investments such as CDs and savings bonds are considered to be not liquid because they take years to mature.
7) What Types Of Investments Are You Considering?
Where do you see yourself putting your money? Based on your time horizon you could be better off investing in growth funds that are heavily weighted toward smaller companies with more potential to increase your return. Investors looking to get out of the market quickly may want to consider larger companies that will return a more predictable return on your investment.
8) Who Will Manage Your Money?
Fees paid to a stock broker or fund manager should be considered whenever you make an investment decision. While a 2 percent fee to have someone manage your money may not seem like a lot, it can add up to thousands of dollars in lost money over the life of your investment portfolio.
Investing is never an easy proposition. You need to know your time horizon, your comfort level when it comes to reading the market and your tolerance for risk. Once you figure that out, you can start investing for the long-term without hurting yourself in the short-term.