10 – Ignore The Noise
Does it seem like the only rosy comments on financial news are the product ads?
Don’t focus on the day-to-day volatility in the financial markets. Ignore the noise. Keep this basic investment rule in mind when making portfolio decisions: When you need your money determines how you invest your money!
- Identify the date by when you need to fund each of your goals
- Determine if a goal is short-term or long-term
- Know your tolerance for investment risk:
For short-term goals, be more conservative
For longer-term goals, risk should be more acceptable
One big challenge when investing is determining if a goal is short-term or long-term. Is a short-term goal something you need to fund within the next few months, or something years into the future?
- • Invest too aggressively for a short-term objective and you may have a loss in your account when you need the money.
- • Invest too conservatively for a long-term objective, and either you won’t have enough money saved or a larger savings commitment is required to fund that goal.
Where’s the line that separates short-term from long-term? Is it 1 year? 3 years? 5 years? As many as 10 years?
Given historic patterns of market volatility, how long a period of time is sufficient to be paid for the risk you are taking? The answer depends, in part, on how much risk you can tolerate.
- Cash and bonds are much more conservative investments, and relatively, lower yielding. Don’t kid yourself, however; you can lose money investing in bonds!
- Stocks are more appropriate for longer-term investments. Stocks offer the best opportunity for higher returns but at a much greater level of risk. Even a prudent, long-term growth strategy can result in losses.
Remember: The goal you determine today is long-term will with the passage of time become a short-term goal. A growth-oriented investment strategy today may not be appropriate in a few years. Monitor your investments!
Each of your financial goals has its own timeline. For example, you’ll most likely buy a house, or fund a child’s college education, before you retire. Here’s a suggestion: Have a separate investment account for each of your financial goals (or one account saving for multiple goals with the same timeline and risk characteristics). In some instances, you must have a separate account, e.g., IRAs, 401(k), 529, etc.
If each account has a distinct investment time horizon, each account can have a different investment strategy with the appropriate level of risk.
You cannot avoid risk when investing, be it loss of purchasing power from inflation, market volatility, economic, geopolitical, changes in tax law, to name a few. Understand the differences in these risks and invest knowing which risks you consider more onerous for each of your goals.