By learning to make better investment decisions you can improve
your long-term financial health. Here are a few tips:
Expected return determines how much you'll have
later. A higher rate of return means the money you've put
aside grows faster. Use a realistic rate of return in your plan to
get a better sense of whether your planned savings and investments
will grow enough to cover your future needs.
Risk and return go hand in hand. The higher
the expected rate of return, the greater the risk, and the more
money you'll need to put into unpredictable assets like stocks. A
lower expected return means you'll invest more in safer
investments, such as bonds.
Long-term price performance matters.
Short-term performance is too volatile to be a reliable measure
when you're planning. Financial planners use long-term market
returns as a guide.
Be aggressive before retirement. Financial
planners suggest that when you're saving for retirement, you should
invest to achieve a high expected rate of return. Because you won't
need the money for a relatively long time, you can take more risk.
Over time, and on average, your return will be higher.
Be conservative after retirement. You should
plan for a lower return during your retirement years. Because
you'll be relying on that money for short-term expenses, you'll
want to invest in low-risk assets to ensure that your money is
available when you need it.
Know what you can handle. Determine your asset
allocation based on the expected returns you've entered. Then
review how you feel about the amount of risk in that allocation.
Are you comfortable with the share of your assets that you should
put in stocks, for example? If not, consider changing your expected
rate of return so that you can adjust the amount of risk you'll
need to expose yourself to.