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Investing should be done in conjunction with other components of your financial life.
Minimizing risk while maximizing return is an ideal investment strategy.
If only it were that easy!
It is important to work with an advisor that is knowledgeable and skilled in all areas pertaining to your financial well-being. |
Investments
The main principle of investing is to identify and obtain specific financial goals and objectives. Your investment objectives should determine your approach to investing. Potential problems exist when the main goal of investing is trying to attain the highest returns possible as it can create unnecessary risks and erratic investing patterns. Such patterns ultimately undermine efforts to achieve the goals and objectives that truly matter to you.
Objectives or targets should be driven by specific future financial needs. In order to achieve financial success, there are several principles to be utilized;
Ensure your goals are:
For example: If Mr. Smith indicated that he wanted to retire at age 65 with $500,000. His goal would be considered specific, realistic, attainable (if properly planned) and having a specified time frame.
What if Mr. Smith had just said he “wanted to be rich when he retired”? This would not be considered a goal but rather a dream.
Some common financial goals for individuals are:
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Managing finances to enable a home purchase
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Saving for college tuition
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Saving for a comfortable retirement
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Minimizing taxes and estate costs
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Trust planning
What is Investment Risk?
Risk is the currency we use to pay for investment returns.
The risk/return trade-off refers to an important investment principle; investments that offer higher expected returns will have more risk. Simply put, investors who are not willing to take risks will experience lower rates of return, however, along with lower returns comes the peace of mind of not worrying about the volatility of your investments. Minimizing the chance of loss is a conservative investment, maintaining an acceptable mix of risk versus return is balanced and exposing your investments to a greater chance of loss is aggressive.
What Is Risk Tolerance?
Risk tolerance is the degree of uncertainty that you as an investor can handle when there is a negative change in the value of your investment portfolio. Risk tolerance is measured on your ability to endure investment fluctuations as well as your financial capability to take such risks.
Everyone processes risk differently. Some people can live with - or can afford to take more risk than others. Generally speaking, when you are younger, you can usually endure a little more risk as you have the benefit of time on your side, you can wait for a rebound if there is a downturn in the market. However, if you are retired or are nearing retirement, you may be counting on income from your investments, and therefore will need to be more conservative with your investment portfolio.
How to Minimize Risk
In order to minimize risk it is imperative that you are patient with your investment plan. A financial planner can design a detailed plan that is in line with your tolerance level and therefore reduces the need to alter your portfolio. Although advisors cannot control the markets, they can contribute to reducing risk by being well informed. An experienced advisor will determine your tolerance to risk and investment time horizon and implement basic strategies to coincide. In order to achieve growth, it is essential that an investor have patience. If an investor does not exercise patience, their emotions could influence them to make changes to their plan when there is a decline in the markets, changes that could undermine the strategies that the financial planner had implemented.
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