New York, NY (PRWEB) October 26, 2004
Most investors are guilty of buying a fund or stock because it looks good, but without giving any real thought about how it might fit into their overall investing picture.
Given the vast attention the financial media pays to individual funds and stocksÂand how little attention it pays to the fundamentals that make a bigger difference, like asset allocationÂit's completely understandable. Instead of creating a plan and then choosing the investments that will best work in that plan, many investors instead have chosen a bunch of investments with the vague hope that they will someday help them reach their goals.
A glimpse of how others create an overall plan for their investing can be helpful. Here is one story from the Armchair Millionaire community:
"I took a personal finance course in college and was assigned the task of computing my net worth and creating a financial plan on my own. Since that day I have been my own financial advisor and believe I'm on the road to financial freedom."
Every large institutional investor (like pension funds or foundations) has an investment policy statement that guides how they invest and keeps them on track to meet their goals, year in and year out. To reach your own financial goals, take a hint from these pros and create your own personal investment policy. My guide tells you how.
The Armchair Millionaire's Guide to Investing Like the Pros
Define your financial values. What is most important about money to you? For many people, it means security or independence. Your own answer to this question will be the foundation for your entire investment policy.
Define your financial goals and time horizon. What goals do you need to achieve in order to be financially secure or independent? For most of us, these goals would include having a certain amount to secure retirement or to pay for children's educations. Also, how many years until you need start tapping your portfolio for that money?
Define your investment goals. What do you need from your investments in order to achieve your financial goals? It might be long-term growth, current income, protection of your capital or some combination of all three. What kind of rate of return do you need in order to achieve your goals?
Define your risk tolerance. How much risk are you really willing to accept to achieve your goals? For example, could you stick with your investments even through a 30 percent drop in their value, or would you sell and run for cover? Your answer to this question will help ensure that you stay the course.
Define your target asset allocation. What proportions of your portfolio will be stocks (or stock funds), bonds (or bond funds) and cash? Your answer will need to take into account your time horizon, risk tolerance and investment goals.
Define your individual investments. Finally, choose which individual investments will make up each asset class in your portfolio. Note that this is the last stepÂnot the first, as it is for so many investors.
THE BOTTOM LINE: All of your investing decisions should be grounded in your personal investment policy. By taking a "top-down" look at your finances and spelling out a road map, your policy will add an important dash of discipline to your approach.
THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: How much do you need to retire? Log on to http://www.armchairmillionaire.com and let us know.
Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at http://www.armchairmillionaire.com.
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