Setting an Investment Goal

Investment goals will be influenced by your income and job security, your risk tolerance and your age. In addition, the time you have to achieve your goals should influence the kinds of investments you consider.

Ask questions such as:

  • How much income do I need to meet fixed expenses?
  • What are my long and short-term goals?
  • How much income do I need for other expenses?
  • Can I just starting out, close to retirement, or someplace in the middle?
  • Do I have children to educate?
  • What is my tolerance for risk?
  • How much risk am I willing to take to achieve my goals?

Once you have determined your needs and tolerance for risk you are ready to take a look at different investments. Make sure that your risk tolerance and your investment strategy match. Investment goals can be:

Short-term - e.g., A vacation in Europe next summer.
Such a short time horizon suggests that the stock market wouldn't be a good place to invest the money you're setting aside for the trip. The market is subject to wide swings, and you wouldn't want to be forced to sell your stocks in a downswing just because the time had come to buy your airline tickets. Don 't put into the stock market any money that you know you will need in the next two or three years. Low-risk vehicles such as certificates of deposit, for example, that mature about the time you'll need the cash or a money-market fund that allows you to withdraw your cash instantly by writing a check may be a better choice.

Medium-term - e.g., A house within three or four years. With more time, you have more flexibility. Safety is of course still a priority but you are in a better position to ride out bad times in the financial markets and take on a little more risk. For medium-term goals like these, longer-term CDs that pay more interest than the short-term certificates you would buy to help finance your vacation trip or conservative mutual funds may be appropriate.

Long-term - e.g., A comfortable retirement; a college education for your kids. For long-term goals, the range of possibilities is somewhat wider: e.g. stocks, corporate and government bonds, long-term CDs, mutual funds. You should also take maximum advantage of tax-sheltered plans, such as individual retirement accounts (IRAs) and 529 collegesavings plans. IRA earnings accumulate tax-deferred, and contributions may be tax-deductible.
401(k) plans provide many of the same advantages and might offer a company match that will help you reach your goal.

Your goals are likely to change, so it's important to reassess them at least annually. For instance, the kinds of growth-oriented investments that might be appropriate while you are accumulating a retirement nest egg and have a long-term horizon could be inappropriate after you retire and need income to pay the bills. There are many resources--magazines, newspapers, books, the Internet, financial advisers-- that can help you decide how to modify your portfolio as your circumstances change.

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