Good investment planning can turn your goals from dreams into realities. This planning involves more than trying to pick the “right” investments. How you allocate your money among different types of investments can have a greater effect on investment success than the individual investments you choose. So, your first step in investing toward your goals is to work out an asset allocation for your investments.
Very simply, asset allocation is the process of deciding what percentage of your money to put in the different investment classes: stocks, bonds, money market, and other investments, such as real estate. Your asset allocation will depend on your investment time frame, your savings goal, and how much risk you are willing to take to achieve that goal.
After you decide on an asset allocation, the next step is to diversify your money within the different investment classes. By putting your money in numerous different investments, you spread the risk – rather than invest in one stock, you might invest in a variety of stocks. That way, if one stock performs poorly, it represents a smaller portion of your overall stock portfolio.
When choosing investments, potential return is a key consideration. The higher your return, the faster your investments will grow and the sooner you will reach your goal. But be aware that the annual percentage returns and yields you see published in ads, prospectuses, and articles don’t take into account inflation or taxes, two factors you need to consider in your investment planning. And the higher the potential returns also mean a higher investment risk.
According to the Certified Financial Planner Board of Standard, financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child’s education or planning for retirement.
The financial planning process consists of six steps that help you take a “big picture” look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.
The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. As life and circumstance change, so your financial plan will need to be reviewed and revised on a regular basis:
*Ensure you are on track to meet your goals
*Identify and address new goals and
*Make sure the financial tools you are employing still meet your needs.