What are your wealth building goals? A comfortable retirement? A quality college education for you child? A down payment on your first home? No matter what your wealth building goals, no matter what your age, you will probably need to invest in order to achieve them.
The need to earn more, and keep your money working hard at all times, is crucial: Your money must grow fast enough to get you to your financial destination. So how is wealth building possible?
FIVE STEPS TO WEALTH BUILDING
Laying the foundation for a sound wealth building plan requires the following steps:
1. Set Your Goals
Just as you must know your destination when traveling, you must know what you want to accomplish before you invest. This requires setting wealth building goals. The most common wealth building goals are growth, income or a combination of the two.
2. Establish Your Wealth Building Time Horizon
Your time horizon is the number of years between today and the time you intend to reach your stated wealth building goals. If you have a short-term wealth building horizon (less than five years), you will want a more conservative wealth building strategy than if you have a long-term wealth building focus (more than 10 years). A five-to-10 year wealth building horizon is said to be “intermediate term”.
3. Identify Your Wealth Building Risk Tolerance
Investors categorize their wealth building risk tolerance as conservative, aggressive or somewhere in between. Generally the more risk you accept, the greater your potential returns, and vice versa.
4. Determine the Amount You Can Invest Regularly Toward Your Wealth Building Goals
Choose an amount that you feel comfortable investing every month or every quarter. This will help you stick with your wealth building plan in good times and bad. Additionally, make a commitment to invest as soon as you get paid. This will help you stay on course with your wealth building plan and accumulate the amount you need to reach your goals.
5. Determine Your Asset Allocation Strategy
Asset allocation means spreading assets among three major asset classes:
Stocks
Bonds
Money market funds/cash
It also means reconfiguring the allocation as market conditions or goals change. The allocation right for you depends on age, income, risk tolerance and the amount you have already put away towards wealth building.
Generally, the longer your wealth building time horizon, the more you should invest in stocks and the less in bonds. While stocks are riskier than bonds, they have provided better returns over time. Money Manager can help you find a financial advisor most suitable to your needs.
HOW TO ALLOCATE YOUR ASSETS
What percentage of your portfolio should be invested in stocks, bonds and money market funds? The answer depends on your wealth building goals and risk tolerance as well other factors unique to your financial situation. As the Investor Profiles below indicate, what may be right for one individual may not be suitable for someone else.
Investor Profiles
Mark, a 25-year-old bachelor, wants to begin an wealth building plan for retirement. Since he has many years to achieve his goal, Mark is willing to assume above-average risk to seek potentially better-than-average investment results. Given this backdrop, Mark chooses a wealth building mix of 75 percent stocks and 25 percent bonds.
Larry and Gail are 33 and would like to put money aside for their newborn child’s college education. Both are cautious, but realize that stocks have the greatest potential for producing good returns over time. They elect to invest 60 percent of their child’s college portfolio in stocks and 40 percent in bonds.
Mary and Glenn plan to retire in a few years. They want to make sure they have enough income to maintain their lifestyle. They also want to avoid outliving their income late in life. They elect to invest 50 percent in stocks, 40 percent in bonds and 10 percent in money market funds.