Successful investment planning is part of the overall financial planning process. Before you begin to assess specific investment vehicles and decide where to put your money, you need to understand your financial situation fully, develop your goals and establish a timetable to accomplish them. In short, you need to know where you are and how you want to proceed prior to building an investment plan.
Asset classes
Investments can be grouped into three general categories or asset classes:
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Cash/money market securities — a conservative investment that pays a current rate of interest; often represents a short-term loan to the most creditworthy companies or government agencies.
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Bonds — represent a loan to a company or a government agency, generally issued for longer periods of time, usually one to 30 years.
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Stocks — often referred to as "equities," stocks represent ownership of a company and are generally considered a higher-risk investment.
Financial situation and objectives
Many factors can affect your ability to support yourself, regardless of what you initially planned. Is your current or projected lifestyle and standard of living consistent with what you originally expected?
Have you experienced a major life event — a death of a spouse or child, birth of a child, marriage, or major illness? Take note of anything you have not previously considered. If your original objectives have changed, make sure your plan still meets your needs. You may need to direct some of your current funds to other investments that better support your goals.
Diversification
A diversified investment approach typically spreads your money among several investment classes and types with different levels of risk. Diversification is based on the likelihood that the market values of some investments in your portfolio will go up while the market values of others go down. It is intended to help reduce overall risk but may not protect against the possibility of losing some or all of the money invested.
Market risk
Market risk means the level that your investment fluctuates, causing your shares to be worth more or less than the original cost when sold. Some people can tolerate more risk while seeking higher returns. Others cannot and want more stable returns, even if the total return over time may be lower.
Dollar cost averaging
Choose a consistent amount of money to invest on a regular basis. The process is called dollar cost averaging. When the price of each fund share is low, you'll buy more shares. When shares are high, you'll buy fewer of them. When you sell, you may have purchased more shares for less than if you tried to guess the top or bottom price of the market. Although it cannot assure a profit, dollar cost averaging has, in certain instances, proven successful in good times and bad. The longer the period of regular investing, generally, the better dollar cost averaging may help smooth out the cost basis.*
Types of mutual funds
There are many mutual fund types from which you can choose — conservative, aggressive, income, growth, value, growth and income, and balanced, to name a few. Consult your investment advisor in order to carefully assess investment vehicles before you decide on a specific investment.
Need help?
Choosing investments is often difficult. You may want help from a financial planner, giving yourself added opportunity to make informed investment decisions — ones that may better help you achieve your financial goals.
* Cost basis is the purchase price after commissions or other expenses.
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