Beating your investing goals is more about knowing yourself than it is about picking stocks
A recent article did a great job of describing ways to make your money work for you. Of the five investments, I’ve actively invested in four and love the results I’ve gotten from each.
It answers the question of ‘what’ investments you can use to get the most out of your money.
But that’s only half the answer you need. There’s also the ‘how’ of making an investment and this one trips up a lot of investors.
That ‘how’ of investing is so difficult because you’ll hear a hundred different answers from a hundred different sources. Investing guidance has become an entertainment industry where appealing to a massive audience is more important than helping individuals meet their investing goals.
The problem is that kind of mass-market investing advice is no help in reaching your investing goals.
In fact, investing may be much more personal than you realize.
Why Investing Needs to be Personal
Everyone loves to talk stock-picking. Tune in to your favorite investing program or click through the web and you’re likely to hear dozens of picks for which stocks to buy or sell.
But picking stocks has very little to do with your investing goals.
In fact, the stocks in which you invest should be the last thing you do when investing. You really don’t even need to pick stocks if you invest in broad mutual funds or exchange traded funds (ETFs).
More important than picking stocks are your personal goals and investing needs. You can make a mistake, picking the wrong stock and still reach your goals. Neglect to make investing personal by thinking through your goals and all the stock-picking skills in the world won’t save you.
What are Your Investing Goals for Your Money?
Most people have a vague idea of why they want to invest their money whether it’s for retirement, paying for kids’ education or just to be able to tell your boss [insert expletive].
That’s a good start but doesn’t go far enough.
You need to make goals for your money. Making your money work for you means nothing unless you know what you’re going to do with it later.
Making investing personal means going further than just earmarking your investment riches for these big, ambiguous ideas. Without a clear picture in your head and the motivation that comes from seeing the finish line, it’s too easy to run out of steam over decades of saving.
Sit down and really think about what retirement means to you. What will you do on a daily basis and where will you travel? The same goes for other financial goals like saving for college. Putting a mental image to your goals makes them real. Take this picture out whenever you need the motivation to keep saving.
Not only will clearly defining your personal money goals help motivate you but it also helps understand better how much it’s going to cost. This is critical to estimating your investing needs.
What are Your Personal Needs in Investing?
Your personal needs include the return you need on investments to meet your goals and the amount of risk you’re able to take.
Most retirement calculators will take inputs like how much you’ve saved and your nest egg target to give you an idea of the annual return needed to meet your goal. That return need is going to help decide what type of investments you need for your portfolio.
Historically, stocks return between 6% and 9% annually over long periods more than a decade. Bonds and other fixed income investments return between 3% to 6% annually but are far less volatile from one year to the next.
So for example, if you need a modest return of 5% then you can invest half your money in bonds and have in stocks to meet your average return needed. If you need a higher return, you might need to put a little more in stocks.
The return you need to reach your goals isn’t everything though. Making investing personal means balancing returns with your risk tolerance.
Think of risk tolerance as how your personality affects your investments. Some people are naturally risk-takers while others prefer a calm walk in the park. How you react to risk and stress is going to factor heavily into your perfect investing plan.
It does no good to invest in stocks if you’re going to freak out every time the market hiccups and you panic-sell. Conversely, the slow-and-steady gains of bonds might bore a thrill-seeker to the point they stop investing altogether.
Putting it Together for a Personal Investment Portfolio
Answering these questions about your personal investing needs is going to affect your asset allocation and types of investments. Sorry for the technical term. It just means how much you put in stocks versus how much you invest in bonds.
Someone with a low risk tolerance may want to put more in bonds while someone that can accept more risk can invest more heavily in stocks. If the percentage in each asset class is likely to meet your annual return needed, by multiplying the percentage by average long-term return, then you’ve got a portfolio that will reach your goals with the least amount of stress possible.
If you need a higher return than is likely from the appropriate mix of stocks and bonds, it might mean you need to save more or be more realistic on your goals. Don’t put more in stocks than your risk tolerance can handle, you’ll just end up making bad investing decisions anyway.
There are lots of little nuances to investing but these basics are the most important decisions you’ll make. It’s not about picking stocks but about making your investments personal and taking the right amount of risk to meet your goals. You don’t need to be an investing professional, you only need to know yourself and what you want out of your money.
Editor’s note: Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.
photo credit: investmentzen Money Paper Airplane via photopin (license)
Great post about making investing personal. Sometimes I think people just want to “invest” because others are doing it… An with no concept of related goals. Investing merely serves as a vehicle for achieving financial goals.
Re stock picking, I always think it’s important for people to realise that when they pick a “stock” they are really backing a real business with assets, employees etc. So although stock picking in itself isn’t that important, the substance of what happens when one invests in a particular company is.
Very true on the stock-picking idea Ken. A lot of people choose their investments almost solely on the basis of corporate activism, supporting the companies that are good social stewards.