Go out into your yard and dig a big hole. Every month, throw $50 into it, but don’t take any money out until you’re ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn’t it? But that’s what investing without setting clear-cut goals is like. If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.
The foundation of a solid financial plan is your list of goals. If you are married or in a long-term relationship, spend some time together discussing your joint and individual goals. Some will be short-term goals, and others will be intermediate or long term goals.
Once the goals are defined and measurable, together with your financial planner, you can then decide how much money you’ll need to accumulate and which investments can best help you meet your goals. Remember that there can be no guarantee that any investment strategy will be successful and that all investing involves risk, including the possible loss of principal.
Understanding risk is vital to evaluating your level of risk tolerance. The concept of risk tolerance is twofold. First, it refers to your willingness to assume risk and comfort level with doing so. This assumes that risk is relative to your own personality and feelings about taking chances. If you find that you can’t sleep at night because you’re worrying about your investments, you may have assumed too much risk. Second, your risk tolerance is affected by your financial ability to cope with the possibility of loss, which is influenced by your age, stage in life, how soon you’ll need the money, your investment objectives, and your financial goals.
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