“You’ve got to be careful if you don’t know where you’re going because you might not get there.” —Yogi Berra
My mother has something going for her that many investors lack. She knows what she wants from her investments. She’s a very healthy 84-year-old, but there’s no denying that she’s a lot closer to the end of her life than the beginning. So much of what she does with her assets revolves around what happens after she’s gone. This is one of her two big goals: she wants to leave money to her children.
Her other goal is much more immediate. Much to her frustration, she is no longer working. She misses the activity. She misses the responsibility. She misses being important to her employer and clients. And because she is not working, her other goal is immediate income from her investments.
It’s almost always important to know what you want, and this is especially true when making investments. Too often, when I ask clients what their goals for investing are, they answer, “To make money,” with a tone that implies, “Isn’t that obvious?”
Of course it is, but it’s not nearly enough. What are you making money for? Are you trying to supplement your retirement income? Or if you are not retired, are you trying to increase your nest egg for retirement? Are you planning to buy a new home? Fund a child’s college education? Leave large amounts of money after you’re gone?
Any discussion of how to invest has to start with your goals. Further, the investment discussion needs to have your goals ranked in order of priority.
My mother wants to leave money to her children, but her immediate income needs are much more important to her. My mother has two clearly defined goals and they are ranked in order of importance. If your investment goals are not as clearly defined and ranked as my mother’s, then you know where to start—right here. How many goals do you have? What is their order of importance?
Some people fret quite a bit over this, but it’s really not that hard. First, make a list of what you need money for. There are potentially two ways to profit from investments: 1) capital gain, that is, they go up in value and are worth more than you paid for them, and 2) income.
If you are investing for income, then you now have one item for your list of goals. You should detail this goal a little. That is, how much income do you need or want from your investments?
If you do not need your investments to give you income now, then you are investing for capital gain. This is sometimes called investing for growth. Just like the income goal, it should be more detailed. How long do you want your money to grow? At what rate? What will you use it for? For example, if you are 61 years old now with a good income, your goal might be to grow your money for the next 5 years until you retire.
The process is more detailed than I have written here. A good financial advisor can help you sort out your goals and then build an investment portfolio around them.
Please keep in mind that it’s okay for goals to change, or to realize that you got it wrong and have to redo things. As a professional financial advisor, I assume that goals get revised from time to time. So don’t obsess about this process so much that you don’t do it. As someone once said, a bad plan is still better than no plan.
Whatever your situation is, get working on those investment goals. Be like my mother. Know what you want from your investments. It sounds silly to say, but it’s a lot easier to get what you want when you know what it is!
Will I Outlive My Money? Part I: Getting the Right Answer
Will I Outlive My Money: Part II: What To Do When the Answer is Yes
Social Security Strategies: Smart Planning
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative with, and securities and advisory services through, Financial West Group member FINRA/SIPC. Comments and questions can be sent to hmasover@fwg.com.