Excerpt Adapted From: The Financial Shepherd®-
Why Dollars + Change = Sense by Glen Wright and Sy Pugh
Truth be told, investing has changed my life and the lives of my clients for the better. My advice to you: Don’t be afraid, be prepared! There is no such thing as the perfect investment so before starting to invest, you have to ask yourself some questions:
Why are you investing? Do you need current income (i.e., bond interest or CD’s) or are you saving for accumulation goals?
When will the money be needed? This is very important, because the sooner you need the money, the less aggressive you need to invest it. For instance, saving for a car you plan to buy next year should be invested less aggressively than your retirement funds that may not be needed for another 20 years.
How much risk are you willing to undertake? Can you lose all or part of your investment and it not affect how you live? We will talk more about this later, but most people don’t really know what there risk tolerance is until they are faced with the situation. I remember in late 1990s (the biggest bull market of all time) so many people I met with said they were aggressive investors; that they were willing to deal with short- term losses in exchange for long-term gains. When the technology bubble burst, I saw them running away trying to sell, sell, sell! For that reason, I believe it is vital to have a plan that changes with the economy.
Are income taxes a concern? If the investment is taxable, will it change your overall tax status? This is important for everyone, especially high income earners. There have been people I met that made good gains in a year, but short-term capital gains raised their overall tax bracket and diminished the gains because of tax consequences.
What is the economic outlook? Investment strategies should be based on whether the economy is gaining or shrinking. This is very important to discuss. Just because you are an aggressive investor, doesn’t mean you should stand idly by and watch your accounts crash when the economy is shrinking. That’s like standing outside in the rain with a closed umbrella. You have the power to change your strategy and protect your assets.