One of the most important parts of taking a cross-country trip is using a road map. Sure, it can be fun to take the back roads and get lost every once in a while. But even when that happens, you usually know exactly where you plan on ending your journey. Retirement investing is similar, only you don’t need to plan on getting lost—the markets will do that for you. Just as a road map can help steer you to your final destination, an investing strategy can help you get your investments back on track if the markets or other forces steer you out of line.
A clear investing strategy can go a long way in determining your success as an investor. Used correctly, it will help you create an investment plan and stick to it. Take a moment and consider your investment goals. Are you investing for retirement, or for a shorter-term goal such as buying a home? Being able to define your goals is essential to help you determine what to look for in an investment, including how much risk you should take, which types of investment vehicles to use such as retirement accounts, taxable investments, or annuities, and even whether to invest with large mutual fund houses or discount brokerages.
Time and risk are major factors in developing your investment strategy. If you have a month to travel cross-country, you can take the side roads, make frequent stops, and take your time to enjoy the trip at a leisurely pace. If you start investing at a young enough age, compound interest has a longer time frame to work in your favor, meaning you won’t need to take as much risk to meet your investment goals.
Now imagine you are driving cross-country and you only have a week to go from coast to coast. In this situation you probably need to stick to the major roads and drive at the maximum safe speed limit. The trip can still be enjoyable, but you won’t be able to take as many side roads or make as many mistakes on your navigation. Similarly, if your retirement is right around the corner, then you might need to make larger contributions and take a little more risk than someone who has a few decades to plan.
Developing an investment strategy doesn’t need to be an arduous process. It can be as simple as writing down your investment goals and determining what it will take to reach those goals. For example, you might write down that you want to become a millionaire in 20 years. Then follow that by creating an investment strategy of saving, investing, and reinvesting your investment income. Becoming a millionaire is a lofty, but achievable goal, even for someone with an average income. And it is much easier to accomplish if it is your stated goal. Writing your investment plan on paper is essential in helping keep you accountable to your investment goals.
The key with your investment plan is to determine your goal and create a plan to help achieve it, but be willing to make adjustments if necessary. I recommend reassessing your investment goals and strategies with every major life event such as a change in job or income, a birth or death in the family, a child attending college, or buying or selling a home.