Become a better investor
Lesson in Course: Investing basics (beginner, 6min )
We have several investment goals. How do we accomplish them all?
As we start defining our investment goals, we might quickly get overwhelmed by everything we want to accomplish. However, just because we have a lifetime's worth of investment goals doesn't mean we need to tackle them all in one day.
Instead, we should focus on one at a time. Let's step through a helpful framework for prioritizing and organizing by looking at some examples.
When we have several goals, it helps to narrow down on necessity and prioritize based on how much time we have. If we look at our goals, we can split them easily into a must-have bucket and a want bucket.
Must-have goals are those that are the most important that we need in life. These goals should be prioritized first and rank them with the most important first.
Wants are goals that are nice-to-haves. These goals should be prioritized next and rank them with the most important first.
A goal's time horizon is critical in developing an effective investment strategy, including the types of accounts we use. Each goal can have different investment strategies.
Once we've separated our goals into must-haves and wants, we can organize them based on their time horizons.
Short time horizons are less than 5 years.
With these goals, we'll need to spend the money in the account soon, so we are less concerned about investments that grow quickly since these tend to be risky.
Instead, we need assets that aren't likely to drop in value because there isn't enough time to recover. The last thing we want is our investments' value to fall right before we need them.
Medium time horizons are 5 to 10 years.
Our investments have more time to grow from compounding by being slightly further out, so we can add some higher-risk assets to our portfolio.
The additional risk gives us potentially higher returns to reach our goal, and we have more time to recover losses before our medium-term goals become short-term.
Long time horizons are more than 10 years.
Longer-time horizons mean we have a longer time to respond and adjust to mistakes, allowing us to take the most risk. Even though these goals are so far away, we need to start investing early to give as much time for our investments to compound as possible.
Over time, our long-term goals will transition to medium and short-term, so we'll need to change our investments accordingly.
Here is how to get started once we've prioritized and organized our goals:
Circle the highest goal on this list, and we'll tackle that first. Let's start with one, but we'll eventually manage multiple goals as we get more experience.
After setting up an emergency fund, retirement is usually the most important must-have investment goal, and it's a great place to begin. Long-term investment strategies can be easier to implement and require less attention to manage. Now that we have a goal to start with, let's learn how to break it down into actionable milestones.