Spread Out Your Savings to Reach Your Financial Goals
PNB MetLife 19-05-2016 11:55:19 AM
Asset allocation makes the most of your value investing options-and gives you the best chance to reach your financial goals.
Most financial advisors agree: the best way to control your investment risk is to spread out your savings among stocks, bonds and cash-the three main asset classes-in ways that match your goals and risk tolerance. A mix of these assets in your portfolio is called your asset allocation.
Having millions of potential value investing options to choose from can be overwhelming. Narrowing them down to three categories can make your job a lot easier. Read More
- Start with your financial goals
Step one is to identify the reason you are investing. Common goals include retirement, preparing for emergencies and paying for college, but you may have other aims, like starting your own business or buying a property.
The next step is to estimate the amount of time you will need before it’s time to fund each of your goals. Having a clearly defined timeline can help you coordinate your savings more efficiently. This is called your time horizon.
- Match assets to time
In general, each of the three asset classes - stocks, bonds and cash-is best suited to a particular time span.
Long term (more than 10 years): Emphasise stocks. Stocks offer the best chance for growth over long periods, where you will need growth to offset inflation. Even a low rate of inflation eats away at the buying power of your savings. It’s important to know that stocks can post big short-term losses. But they haven’t lost ground during any period of 20 years or longer since at least 1926.
Medium term (between 2 and 10 years): Emphasise bonds. Although they offer less long-term growth potential than stocks, bonds held to maturity have a lower risk of loss than stocks. If you are not comfortable with a high risk potential, you should opt for a medium term investment. Should you be unsure of which way to go, you can always consult a financial advisor. Such guidance can also help you to decide whether you want to invest in mutual funds.
Short term (less than 2 years): Emphasise cash investments such as stable value funds and material objects. These are highly unlikely to lose value, but also provide very little growth, especially in an era of low interest rates.
- Personalise your mix
Finally, consider how you respond to stock-market swings. If fear of downturns keeps you up at night, think about reducing your stock holdings relative to other investments. That doesn't mean cutting out stocks completely. Say you plan to retire in 20 years: if you are a conservative investor, conventional wisdom suggests that you might hold 60 per cent in stocks, but if your financial planning is aggressive, you might hold 85 per cent or more.
As you draw closer to your financial planning goals, you can preserve your savings by gradually shifting investments out of stocks and into bonds and cash. You might also want to consider mutual funds. That will give you the best chance of achieving your goals – and that’s the whole idea, isn’t it?