Before You Start Investing
Decide Why You are Investing

Before you start investing, you need to decide why you are investing. This may seem to be pretty obvious, but you need to have a purpose and goals to be successful at investing or anything else. You can't get where you're going without first deciding just where it is you plan to go and when you plan to get there, otherwise you'll just end up somewhere sometime and that may not be where and when you want it to be.

Knowing why you're investing and what your investment horizon is makes it possible for you to make other decisions, such as:

• How much risk you can afford and stand. If your risk tolerance is low, your targeted rate of return will be commensurately low and the amount of money you need to invest will be greater.
• How much you need to invest initially and subsequently on a periodic basis to meet your goals assuming a target rate of return that is consistent with your level of risk tolerance and a specific investment horizon.
• If you find that you're not making your targeted return, adjustments will have to be made. Without goals, you will have no target and will not know when adjustments need to be made.

Even if your reason for investing is "To make as much money as possible.", you'll do better if you set some goals before you start investing. Decide how much you're going to invest, when you're going to invest it and for how long you plan to keep it invested. Then you can set a targeted rate of return that's consistent with your risk tolerance and see what your probable future wealth would be. If it's not enough to satisfy you, reassess your risk tolerance, targeted rate of return and the amount money you feel you can afford or are willing to invest.

If you're saving for retirement, you will probably have some intermediate goals and maybe incremental investment horizons. Or you may have an ever-widening range that you need to stay within and plan to make a gradual transition to a less risky portfolio that will generate a minimum stream of income. These, too, are goals that will define your long-term plan.

Making these decisions now will make it possible for you to set your goals, monitor your success at achieving those goals and manage your portfolio accordingly. Once you've defined your goals and your investment horizon, you'll be ready to start investing.

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Move on to the next subsection, Define Your Investment Universe.