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Investing Process: Preparation

  1. Preparation - A description of determining risk levels and term of investment
  2. Set Up Accounts - Getting started with the necessary accounts
  3. Picking Investments - Investment options discussed

Once you have some cash (in a bank account) that you have determined can be invested, it is important to decide what you are going to save it for because that determines how long it will need to be invested. Short term investments might be used for a soon to be purchased car or up coming trip and these funds should be invested in very safe instruments i.e. CDs, money markets, or short term US Treasuries. For longer term goals i.e. down payment on a house, savings for retirement, new baby’s college fund: these savings should be invested with your risk tolerance considered in order to position the savings in such a way as to allow it to grow in an appropriate manner with your risk.

Risk is very personal and difficult to determine. The recent financial meltdown in the financial markets has made individuals more aware of the financial risk in the markets. Having said this, the very recent upward move in the market over the months of March through September 2009, shows that there is also amazing possible appreciation in corporations’ equity. Therefore, it is essential that every person decide how much risk they want to take and invest appropriately. In other words, which bucket do you fall into – Conservative, Moderate, Aggressive. A person may start off in one area and move to another as their understanding allows for different perspectives. Having decided which of the Investment buckets you fall into, you will then need to decide what your Asset Allocation will be. The investment bucket helps to define those parameters.

A ‘Conservative’ investor would be looking for a long term (10years) annualized return of 5 or 6%. In order to achieve this target and still be within the risk parameter, an investor would need to have an Asset Allocation more heavily weighted in Fixed assets (bonds, or bond funds) – 50% to 75%. The more Fixed Assets the less risk and the less growth.

A ‘Moderate’ investor would be looking for a long term (10 years) annualized return of 7 to 8 %. In order to achieve this goal the Asset Allocations needs to be more balanced with a 40% Fixed and 60% Equities; 30% Fixed and 70% Equities; 50% Fixed and 50%Equities or some combination of Fixed and Equities with a bit more in Equities. It is important to understand that there are bonds and equities that can be less risky or more risky.

An ‘Aggressive’ investor would be looking for a long term (10 years) annualized return of 9 to 11 %. In order to achieve this goal the Asset Allocation needs to be more heavily weighted in Equities with maybe an allocation of 25% Fixed and 75% Equities.