Time, Risk and Investment Goals
When you begin stock investing you should clearly determine your goal for doing so. The goal you will identify for yourself will not be the same as the one another investor has set. Additionally, you should expect that your financial goals and the risk you are willing to take change over time because your way of life changes as well.
However, you should be clear that the goal that you establish today represents the goal at this point of your life. It will be the driving force of the investments you will execute in the near future.
If you are a young investor, you are more likely to take higher risk. Moreover, most young investors tend to focus on investments that provide growth.
However, as you near middle age, your investment style starts to change since your needs change. You will most probably be less willing to face higher levels of risk and start to bet on stocks with more predictable growth.
When you near your retirement years, you become even more conservative. At this point of your life you will be more concerned with capital preservation and you will pay less attention to growth. As a result, most investors tend to concentrate on bonds and fixed income investments, overlooking stocks which carry higher levels of risk.
The latter (stocks, bonds and cash) should be presented in a certain proportion in your investment portfolio. Many investors find it difficult to determine these percentages.
Since the proportion depends on the individual conditions of every investor it is difficult to give a certain working for all proportion.
However, a useful rule of thumb is that the percentage of bonds or fixed income investments in your portfolio should be equal to your age. For example, if you are 39 years old, 39% of your portfolio should constitute of bonds and fixed income investments, whereas the remaining 61% should be in stocks.
However, you should not consider this as a straight formula you should follow. There are other factors that should guide your decision, such as your risk tolerance.
You should keep in mind that the higher number of stocks in your portfolio leads to a more aggressive investment style. On the other hand, the less the number of stocks the more conservative your portfolio is.
It is up to you to decide on the investment style you will follow. After setting your mind on this you will be able to determine the mix of stocks, bonds and cash that is most suitable for your investment goals.
If you are still in your early ages a conservative way of investing may hamper the quick reach of your investment goals. However, one can never be sure, and this may be exactly the investment style for you.
On the other hand, if you are nearing retirement and you still invest aggressively, a turn in the market may lead to the loss of the money you have accumulated for retirement.
Finally, it is up to you to decide on the investment approach you will follow but have in mind that the style you choose will govern you investment decisions, which in turn can have a deep impact on your goal achievement.
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