Have you ever wondered if what your investing in is the right thing for you? If you have you are asking about investment management.
Investment management is the professional management of various securities and assets used to meet specific investment goals for the benefit of the investor (Wikipedia).
How would an advisor invest your money?
Every person has their own unique set of needs and goals for their future. Saying this, the same old cookie cutter” approach will not work for everyone. With this in mind you need to take some time to figure out exactly what you are saving for.
- Saving for a child’s college expenses
- Buying a home/or paying off a mortgage
- Saving for a new car/truck
- Family vacation
Having your goals lined out will help give you and your advisor a good idea of which direction your investments should be heading in, as well as a proper time horizon. Having an appropriate time horizon also helps when determining what type of investment products are right for you. You don’t want to be investing in a 10 year security if you need the money 1 year form now.
The next thing you would need to consider is your risk tolerance. How risky are you when it comes to investing? How much are you comfortable with loosing in the market? These are important things to consider, as it determines what type of investment product is right for you. This also varies person to person, although the closer you are to retirement age, usually the less risky you become. This is for good reason. It is harder for a someone who is getting ready to retire to make up for a 30% decline in their portfolio than it is for someone that has 15-20 years of work ahead of them.
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Allocating your investments
The next step is determining what type of security product is right for you. This can seem like a daunting task with the seemingly endless choices out there. Common stock, bonds, mutual funds, ETFs, and commodities to name a few. How will you ever decide what to choose? This is when you and your advisor need to sit down and discuss the objectives of your portfolio, and choose the proper asset allocation that is right for you. Whether you want something that is protected from large market swings or something that moves in-step with or above the market.
Asset allocation is a very important step in building your portfolio. Having a variety of different products helps to diversify your portfolio and reduce risk. You can diversify with equity, fixed income, and cash. Having more in an equity portfolio will expose you to more risk, but also a possibility of a greater return. A portfolio that is invested more in fixed income is more protected form the market swings.
A good rule for investing is the 100 minus (your age) rule. This rule is used for what percentage of your portfolio should be in the market, and what percentage should be in fixed income or bonds.
For example: if you are 45 , take 100 – (45) = 55. This means 55% of your portfolio should be in the market and 45% should be protected in fixed income and bonds. However, some experts now say that we should use the 120 minus your age rule since people are living longer, and the age for retirement is going up. With this rule, someone in their 20’s should be entirely invested in the market, allowing them to ride the waves of the stock market to increase their portfolio. Although this strategy is not right for everyone,depending on your risk tolerance, it is a good place to start for a novice investor.
Take your time to decide what is right for you.
Before you make a final decision, make sure you are comfortable and happy with the investments you are leaning towards. Do your homework before you commit to something that you are ultimately not happy with, and consider these facts:
- Carefully weigh the risk involved.
- Make sure that you are cost efficient in your choices, as the fees and expenses vary greatly within the financial services industry.
- Be aware that just because investment has done well in the past, it doesn’t mean it will do well in the future.