We plan our work days, our weekends, our vacations, our shopping, etc. Sometime daily routine or chaos gets in the way to see the bigger picture; our financial future, retirement. It is very easy to be penny wise but pound foolish if we don’t have a goal to reach to.
So, how do we make an investment plan that would make sense?
First step is to have GOALS! When determining goals, try to be as specific as possible. Also note that whatever you write here is not written into stone, so update your goals as needed.
A few good examples would be; save $50,000 for down payment by 2015, have $3 million in retirement account on the day I turn 60, etc.
Second step is to set up a plan for each goal you’ve determined at step one. In this step, you need to identify how much you need to save for each goal, where to save it (IRA, taxable, etc.) determine your asset allocation so you take neither too little risk nor too much. Another big component of step two is to have a plan B in case things don’t work out the way you planned for.
If we use our goals from step one, saving $50k by 2015 is a relatively short time, so a taxable account would work better. Again, it is relatively short time so you should not take too much risk for this fund. Therefore, your asset allocation should favor bonds over equities. A nice plan B would be to buy a smaller house if you are short in down payment or save one more year.
Third step is to select the best investments to fulfill desired asset allocation. Costs are a major factor when selecting investments so keep an eye the cost.