While spontaneous decisions might be fine in deciding how to spend your weekend, foreCredit: Image: photostock / FreeDigitalPhotos.netthought and planning are crucial to achieving investment success. When deciding whether to purchase an investment, consider the following points:
Investment Goal: Income, Growth, or Capital Preservation?
Why do you want to invest? Are you retired and need income on a regular basis? Is the assurance of having a steady stream of income more important to you than potential double-digit returns? Do you need growth? If you are saving for a new house, retirement, or some other goal, you want your money to grow. Yet, often the returns desired in growth investments require assuming a certain amount of risk. Or, are you looking for capital preservation? Do you want to be sure your investments retain their value in the future? If you live in a high-inflation environment or are retired, this would be a central point to consider before purchasing an investment.
Since many people have goals that fall into more than one of the above categories, it is important to prioritize which is more important and purchase investment products accordingly.
If you’ll need your money sooner than anticipated, will you be able to get it? Are there any financial penalties for taking money out of a mutual fund or bond fund early? Cashing in CDs before they’re due might also carry hidden costs. Liquidity in and of itself isn’t a requirement for successful investment (often it’s fine to “lock” your money away for a given time period); however, you must consider liquidity as a factor before investing in any product.
Remember that not every investment in your portfolio needs to be easily converted to cash, but a certain amount of your portfolio should maintain liquidity. The amount of liquidity necessary depends on how far you are from reaching your fiscal goals, and whether your portfolio is an “investment” portfolio (saving for some time in the future) or a “nest egg” portfolio (providing for all of your current living expenses).
Before purchasing a specific investment, look at the larger picture. Stay focused on your final goal, and make sure every particular investment furthers that goal.
To find out more about what you need to know when making an investment decision, read, Know the Facts.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.