One of the keys to successful investing is to have a plan. Setting the right investment goals can go a long way to developing one that works for you.
1. Know Why You Are Investing
It always helps to know why you are doing something. Think about why you want to invest. Are you hoping to build up your nest egg? Do you want to quickly build up enough for a down payment on a home? Are you creating an income portfolio?
Determine why you want to invest. Being able to point to a specific reason for investing can help you set the right goals, and can provide you with a way to stay motivated as you move forward.
2. Be Realistic
If you are creating an income portfolio with the help of dividend stocks, chances are that you won’t see significant income in 12 months. You need to be realistic with your investment goals. Whether you are investing money in a tax-advantaged retirement account elsewhere, you need to acknowledge the realities of your situation.
The next few years could be volatile. However, over time the market is likely to smooth out. In any case, you have to be realistic about your returns over time. The latest DALBAR survey points out that the S&P 500 returned 7.89 percent annually over the last 20 years. Expecting 10 percent returns might not be realistic.
You also have to be realistic about what you can do right now. Don’t grandly proclaim that you’re going to invest $500 a month when you aren't even sure if you have enough money for groceries. Really look at your situation, and set goals that are realistic.
3. Break It Down
Break down your investment goals into achievable milestones. Investment success is hard to come by if you find yourself constantly frustrated about your lack of progress. Start out small, with a reasonable monthly goal of saving $100 a month to invest. Then, while you do this, look for ways to find more money in your budget by cutting spending or earning extra income. Make a plan to step up your investment to $150 a month after a couple of months, and then up to $200 a month beyond that.
Also, keep your focus on making slow, steady progress rather than amassing some specific amount years down the road. Instead of telling yourself you need $1 million in your retirement account, break it down to a monthly investment (with a realistic expectation of returns). This will make the goal much more manageable, and you’ll set yourself up for success.
4. Start Simple, With Something You Know
As you begin investing, start simple. Don’t just jump into stock picking, or decide that you want to trade forex. Instead, begin with something simple, that you know. Begin with a broad index fund. Make regular investments (use dollar-cost averaging to make the most of a smaller budget) to the index fund while you research other investments. As you find success with the simple stuff, and as you have the chance to learn about more complex investments, you can slowly branch out.
However, before you invest in any asset, you should understand how it works, and the forces that influence it. Staring simple allows you to find regular success with something you understand, and make progress as you learn about other opportunities. Once you have established your foundation you can branch out.
Miranda is a freelance contributor to several investing and personal finance web sites. She also writes for her own blog, Planting Money Seeds.