Which strategy will be best for you?
Most portfolios should be structured with 5 financial objectives
in mind:
- Growth
- Income
- Inflation protection
- Peace of mind and preservation of capital
- Minimize taxes
You have to weigh and balance the importance of each and
keep them in mind as you structure your portfolio. There is
no such thing as an optimal balance that’s right for
everyone. The balance between them is personal and depends
on the relative importance of these factors for you.
Your thinking should begin with these three questions
1. What are your goals? Why
are you investing? To accumulate money for a specific purpose?
A house? A cottage? A fabulous vacation or trip? For retirement?
Which is more important to you at this point – growth
or security? Are you investing to create income now or in
the future? What kind of performance do you expect from your
investments?
2. What is your time horizon?
When do you want to realize the fruits of your investment?
How long will it be before you will need to draw on your invested
capital or access your investment earnings? This is critical
because both the risk and the reward of investments can vary
according to the time horizon. Generally, the more time you
have, the more aggressive your investments can be. The less
time, the more you need to avoid risk.
3. What is your risk tolerance?
There is a risk-reward continuum running from cash to bonds
to stocks. You have to weigh the return you want against the
risk you’re willing to tolerate. If you want to earn
double-digit returns each year with no risk, you simply can’t
do it.
We’ve looked at the emotional part of risk, but risk
has other dimensions. You also have to consider how easy it
is for you to replace your capital. If you’re not earning
any income, replacing lost capital will be difficult, which
means a more conservative approach. Other considerations are
your present financial situation, your estate plan and your
level of taxation.
One other important factor is your age. As a general rule,
the younger you are, the more aggressive you can afford to
be with your investment portfolio. The older you are the more
conservative you should be because you have less time to recover
from any possible setbacks in the value of your portfolio.
Simply put, deciding on your assets allocation strategy
is difficult. Or if you’d like
to receive personal assistance, click
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closest to you.
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