Define your investment goals before buying stocks

Author: Steven posted in Asset allocation tagged with Investing 101

As Paul Nitze famously said “One of the most dangerous forms of human error is forgetting what one is trying to achieve”. If you are considering investing in stocks this couldn’t be more true. Because of the stock market’s nature and the amount of information we are bombarded with on a daily basis it is easy to forget what we are trying to achieve when buying and selling stocks unless we have defined our goal and the investment strategy we will use to achieve our goal.

Defining a clear goal is one of the first tasks an investor should complete before buying stocks. When defining the financial goal you are investing to achieve two things are very important; the dollar amount you want to reach and the time frame you have to achieve it. If you cannot decide on a dollar amount to be achieved within a certain time frame then you are not preparing yourself for success but simply daydreaming. Try to avoid being too vague such as “I want to become a millionaire by my early forties”. Be as realistic and precise as possible in defining your financial goal because this will in turn drive the investment strategy you will use to reach your goal. The investment strategy you select will have an associated level of risk which is largely determined by your asset allocation decision, i.e., how much of your total portfolio will be invested in stocks and how much in bonds and cash equivalents. Without a clear financial goal it will be difficult to select a proper asset allocation and wealth building strategy to achieve your objectives.

It is usually not the investor’s plan that fails, but that the investor fails to plan. Investors who take the time to write out their goals and plans end up with much better results than those that don’t.

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