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The Most Important Part of Financial Planning: Why do I Need Goals?

The Risk

Often, we learn about "high-flying stocks" through various media outlets, in locker rooms, in bars, on CNBC or related business news networks. The problem is that by the time the general public hears the information touted for these stocks, most of the advantage of investing in the stock may have already been lost. Stocks analyzed on new shows may actually be affording no special information, yet the presentation with its corresponding visuals make it sounds as if the stock is a great investment. One might be tempted to take advantage of these "stocks tips." Unless one has a plan of investment action in mind, goals are the critical part of this investment action plan.

Once you have created an investment plan with specific and prioritized goals, every time a stock is analyzed in some form, you can simply measure the information from the stock against the goals and priorities already. In this manner one can determine whether the stock would be a good buy for the portfolio. This helps to avoid the feeling of buying or impulse buying. One of the primary reasons to have goals is to try to avoid certain types of pre-determined risk. This also can help you sort through certain types of risks, again in a pre-determined manner. A list of risks may help you determine which investments might be best for you. A list of risks includes:

  • Investing your money risks
  • Market/ economic risks
  • Advising and interest rate risks
  • Credit risks
  • Inflation risks
  • Mistake risks

The risk about investing your money.

A common problem today among people nearing or at the retiring time and age is that they may live the length of another entire career, some 20 to 30 years longer after the date they retire. This is not only a possibility, but in many cases a distinct probability. However, the savings plan was based on them not living that long and as a result they may either have to cut back in spending during the retirement or run the risk of outliving their money.

The market/economic risk.

The purchasing stocks or stock funds or bonds is the risk that the market will not be the same as on the date you make your purchase. That is, the market can either go up or go down very quickly. As a result, you will be accepting some risk anytime you buy a stock, stock fund or bond. The manner in which you weight against the risks in this scenario is to invest for the long term. Over time the Dow Jones average makes money. However, measured in any given quarter or any given month significant losses can be found historically. One can help in this area in by selecting certain stock groups, such as industry groups versus pharmaceutical groups, versus energy groups, and a diversification among each of those groups may help to deter that a downturn in one part of the economy may be affected by other parts. Actually, historically we have seen situations where the entire economy has been devastated by downturn.

Interest Rate Risk.

This has been a common risk discussed in the 1990's, that is, where we are very concerned about an increase in interest rates. This risk is particularly applicable when you buy bonds, but also applies to stocks, especially recently, since the stock market seems to be in great fear of an increase in interest rates.

Credit Risk.

Credit Risk is where an individual company in which you may have invested may not be able to pay back its debt. This is theoretically a possibility for any stock company offered on the NASDAQ or DOW, although it would be much more likely for initial public offerings and related companies. Also, bondholders must be aware of the fact that their bonds may be downgraded making them less valuable. Research in companies offering stock or bonds is apt to alleviate this problem, but no simple method of analysis is available.

Inflation Risk.

A risk of inflation is always at the back of investors’ minds. The late 1970’s demonstrated what happens when inflation is rampant. For the past 15 years inflation seems to be under control or even on the decline depending upon the economic indicators studied. This has given relative calm in the investment community, which has helped to result in substantial returns on investments. Generally, the annual 10% return is considered to be acceptable in a good quality investment.

These five risks are inherent in the way investors ought to measure risks when they look at different methods of investments. Many investments carry a low degree of investment risk, such as bank saving accounts, money market accounts and Certificates of Deposit. Many investments carry a high degree of risks such as web stocks, and often high technology stocks. The investor must analyze the risks inherent in each of these and determine, based on their goals, what is the proper amount of risk for each investment. Keep in mind, that varying degrees of risk may be acceptable in an investment portfolio strategy if there is ample time with which to recuperate any significant losses. An investor needs to determine which of these risks are acceptable for their personal investment needs. The investor trying to determine the proper amount of risk to assume in his or her investments ought to establish certain questions in their minds.

The Most Important Part of Financial Planning: Why do I Need Goals?
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