I vividly remember a woman in one of my classes who stood up and proudly announced that she had maxed out her 401(k) and had a hefty portfolio outside her retirement. She’d been buying stocks based on the recommendations of her cousin who worked at a brokerage firm.
She had a right to be proud. But when I asked if she was following a plan, she looked bewildered.
“How do you know if the portfolio is properly diversified for you?” I asked. “How do you know if you’re taking too much or too little risk?
I then explained the difference between gambling and investing.
Picking stocks or bonds haphazardly, following a hot tip or purchasing the hottest fund, trying to time the market (buying when it’s high, freaking out and selling when it plunging), or just simply deferring investment decisions to another and turning your back…that’s gambling.
Investing, on the other hand, is a means to an end. The whole point of investing is to put together a portfolio that ensures you meet your goals. If you don’t have some sort of idea of where you want to end up, it will be far more difficult to make the right choices.
A good financial plan addresses three questions: Where are you now financially? What are your goals (short term and long-term)? What do you need to do to achieve your goals?
Once you identify the gaps between where you are now and where you want to go, you can create a realistic game plan with the right mix of investments based on your time horizons, budgetary restrictions and risk tolerance (how much volatility can you stand and still sleep at night).
Sure you can do this on your own. But my advice: Hire a fee-only Certified Financial Planner or a financial advisor you trust.
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