Issue time 8:44 am, by CTreit
Category:Financial Goals
What to do about the risk of not reaching your financial goals?
July 13th, 2010This is the third post in a series on “obvious and hidden financial risks.” (To read the other posts, please go to “market risk” and “purchasing power risk”.)
As you may know or guess, setting financial goals and establishing plans to reach them are probably the most important financial undertakings you will make in your lifetime. For example, saving for retirement is the best way to ensure your future. The goal there is to have enough savings accumulated to make your final years as pleasant as possible. You might also want to save for big-ticket items like homes, or educations for the next generation. Regardless, you want to maximize the number of dollars available at the time you’re ready to spend them, keeping in mind the limit of your tolerance for taking market risk.
Of course, you want to use the savings strategy that makes the most of your money – but to do this, you have to also balances the various risks involved when saving for a goal. Many people would rather “be safe than sorry.” For example, you may want to avoid investing in stocks, let’s say. But there’s always the chance that not investing may increase the risk that you might not reach your long-term financial goals. You should consider exposing yourself to market risk because investing in the stock market over the long run makes your dollar savings work harder to bring in even more dollars to get you closer to your financial goals. One can be so “safe” that you end up sorry you didn’t take more risks and let your hard-earned money earn more money!
Alternatively, some people tolerate risks better than others. Now, it is also entirely possible that choosing to invest your money and take on more risk moves you even farther away from your financial goals. Things can go so bad that you even have to abandon your financial goals entirely: no new house, no new car, no retirement or delayed retirement. That would not be a good course to take.
How do you reduce the risk of not reaching your financial goals? Know your facts. Over the long run, the stock market goes up or at least stays even. Over the short run, the market is far less predictable. Keeping this knowledge in mind will reduce the risk that you do not reach your goal. So, if your goal is far enough in the future, put some of your money dedicated to that goal into the stock market. This way, you take advantage of long-term upward trends in the market.
If you need to reach your particular financial goal in the short term – meaning within a few years – then stay out of the stock market. You’ll avoid market volatility and keep your money safe. Said another way, to overcome volatility in the market, you need to stay in the market for time long enough to recoup any losses you might have. If you only have a short time to save, and your investments go down during that short period, you may not have enough time left to recoup your losses. So use your time wisely (whether you have a lot or a little!), and you’ll be more likely to reach your financial goals.
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