Investing in an Uncertain Economy For Dummies by Sheryl Garrett

Author:Sheryl Garrett
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-03-10T00:00:00+00:00

Chapter 39

Create a Portfolio You Can Grow and Consume

By Katherine Holden, ChFC, CFP

Creating a financial portfolio may feel daunting. A portfolio that’s designed for simultaneous savings and withdrawals is challenging to put together, but growing a portfolio and consuming a portfolio at the same time is possible. The key is to divide your portfolio into sections that are dependent on when you’ll need the funds.

Develop Goals with Varying Time Periods

Investment goals are generally either short-term or long-term. For a short-term goal, you save and invest money to be used within one to five years. In this situation, you want to grow your savings, but you’re equally concerned about protecting what you’re putting away because you’ll need to spend it within a short time. You have much less tolerance for risk in your investment choices.

Longer-term goals may be 10 or 30 years in the future, so you’ll be setting aside money regularly, growing it, and then using it either all at once or over a period of time. Your goal may be to save a sizeable down payment to buy a house; you’ll use all your savings at one time in this scenario. You may choose to assume a higher level of risk because you have more time to reach your goal. But the closer you get to your goal, the less risk you want to take.

Or your goal may be to put money away for your children’s college education. You’ll be saving over 18 to 22 years if you start at the birth of each child, and you’ll likely spend those savings over four to eight or ten years (depending on how many children you have).

Create the Portfolios

This strategy offers you four examples of short-term versus long-term goals to show you how investment choices may vary. Suppose you want to purchase a refrigerator, buy a car, save a down payment for a house, and fund a two-year trip around the world 20 years from now. You can reach these goals by investing the money differently for each.

Start with a list of the items you want to purchase or fund and prioritize them. These are your goals. Prioritizing your goals helps you decide which goals to fund and which ones to delay funding when you experience tough financial times.

Think about the cost of each goal and your time frame for each. You may

Use one account to save for all four goals.

Use several accounts based on the time to complete your goals.

Use separate accounts for each goal.

Be sure to consider the account and transaction fees that your brokerage firm charges. Using one account for all four goals may end up being confusing when you try to track what amount and which investments are linked to each goal.

Goal #1: Save $1,200 for a fridge in a year

For money you need soon, carefully choose the savings vehicle. Avoid stocks! If the stock market is down, you won’t have the funds you need for the purchase.

Consider an FDIC (Federal Deposit Insurance Corporation) insured account, such as a savings or money market account, at a bank or credit union.

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