Developing a Plan

The mindset of an investor is fundamentally different than that of a saver. While a saver is looking just around the corner, an investor is looking years down the road.

So, as an investor, the best way to achieve your long-term financial goals is to develop a comprehensive plan and stick with it. Establishing a plan will help you determine how much money you need to invest and how much money you need to earn to achieve your goals.

To get started, follow this five-step plan:

• Define your goals and objectives. What do you hope to achieve from your investment plan? For example, you may want to build a retirement fund, accumulate assets for a child's education, or save money for a new business venture. Whatever goals you may have, formalize them by defining and quantifying them.
• Determine your time horizon for meeting each goal. Chances are, your goals have different time frames. For example, you may have 25 years until retirement, but only 10 years until your child enters college. Knowing how much time you have to achieve your objectives will help determine the best investment strategy for each goal.
• Calculate your regular investment. Determine how much money you can afford to invest each month versus the total amount you need to achieve your goal. When calculating how much you can afford, remember the importance of “paying yourself first,” or giving your investment allocations priority over other expenses.*
• Evaluate your return rate. Most likely, there's a gap between what you can afford to invest and the amount required to reach your goal. The rate of return on your investments will help close that gap. By calculating the percentage gain you will have to earn each year to achieve your goals, you can choose investments likely to offer such a return.
• Establish your risk parameters. Risk and return go hand in hand. Typically the higher the return the greater the risk, and vice-versa. So, it's important that the rate of return you pursue contains an acceptable level of investment risk. For example, if your goal is 25 years away, you can afford to take more risk. If your goal is only 5 years away, you will need to be more conservative. No investment is worth owning if the risk associated with it keeps you awake at night.

To determine how much you may need to invest and earn for retirement and/or college, use our interactive Retirement Planning Calculator and College Planning Calculator.

Important risk considerations. All investments contain some degree of risk. When forming a plan, it's important to determine your personal risk tolerance, based on your investment time frame and your comfort level with changing investment values. For example, if principal stability is more important than earning higher returns, you have a low risk tolerance. If you can accept short-term volatility in exchange for greater growth potential, you have a higher risk tolerance. At the same time, keep in mind a low risk tolerance may be more appropriate for shorter-term goals. If you have several years to invest, consider taking on more risk in exchange for greater return potential.