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Risk Advisories? Only Time Will Tell

October 12, 2006
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When it comes to investing, there's no one-size fits all. Your strategy will vary, depending on your stage in life, financial resources and specific goals, according to the Pennsylvania Institute of Certified Public Accountants.

Setting goals is the most important part of planning and implementing any investment plan. For example, are you trying to save for retirement, a new home or college tuition?

If you would like to save for all three goals, prioritize them and set a time frame for each. Recognize that you will have more time to save for some goals than others. Financial goals are generally classified as short-, medium- and long-term. Knowing how long you have until you need the money for each goal will help you determine the appropriate investments.

Short-term goals are generally defined as those that you hope to achieve within one to three years. Common short-term goals include paying off credit-card debt, going on a vacation and making a down payment on a car. If you have more than one or two short-term goals, you'll need to prioritize them.

Low-risk, cash-equivalent accounts such as a passbook savings or money markets are generally the best investment options when working within a short time period. Other possibilities include Treasury bills with a maturity of one year or less and bank certificates of deposit. These safe options generally garner lower returns than riskier investments.

Stocks or mutual funds, which can fluctuate greatly, may not give you the return you need in the short term. It is possible that you could lose money if you had to sell your investment at a time when the market is down.

Now, medium-term goals fall in the three- to five-year range. For these goals, such as saving for a down payment on a house, a conservative approach remains the best strategy.

Weigh the Risks
The higher return you might earn by investing in stocks may not be worth the risk that the market may fall at the time you need the money.

When investing for this timespan, longer-term CDs, short-term bonds and Treasury notes would be appropriate investments. Keep in mind that as your financial goal gets closer, you will have to move funds into cash-equivalent investments.

Flexibility Added
With a long-term goal, such as saving for your child's college education or your own retirement, time means more flexibility.

You can invest in growth assets, such as stocks, which fluctuate more but tend to produce a greater return over time. Unlike more conservative investments, stocks can outpace inflation, an important consideration when investing for long-term goals.

Since you have time to weather ups and downs in the market, the risk is reduced.

How you allocate your assets among the different types of investments takes on increased importance when investing for the long-term. Choosing the right mix of stocks, bonds and cash equivalents is the single most important factor for successful investing.

Remember, as you move closer to the time when you'll need the money, reallocate your assets toward more conservative investments.

If you're like most people, your financial goals will shift throughout the course of your life. You must review your goals and investments regularly to ensure that they reflect your changing needs. 

 

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