Set Realistic Investment Expectations

Someone once said, "If you don't know where you're going, how are you going to get there?" The first step as a potential investor should be to decide what you want to accomplish with your money, and when you want to accomplish it.

To establish investment objectives, one should understand investment basics. There are difference between investing and speculating. Once you realize that investing is not gambling and approach investing with discipline, your money can work for you.

Benjamin Graham, author of The Intelligent Investor, said: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” A basic premise of investing is avoiding the tendency to make emotional decisions.

Step 1: Determine What's Most Important To You

The first step to investing is to determine which of the following results are most important to you:
•Safety
•Income
•Growth

The ideal investment would provide them all: it would be completely safe, it would provide you with a sufficient level of income to keep pace with inflation AND your principal would grow.

That “perfect investment” does not exist. Instead, the investment world looks like the triangle in the top right corner.

As you move toward one corner of the triangle you move away from the other two. If you want an investment that is safe, you have to be willing to accept less income and growth.

If you want an investment that produces consistent income, you have to understand that it will not grow as much. If you want an investment that grows, you have to be willing to accept less safety.

To avoid chasing returns, investors must realize they can't have it all. Different types of investments provide different results.

Step 2: Determine Your Time Horizon

•Short term: money you will potentially need within 1-2 years.
•Mid term: Money you will potentially need within 3-9 years.
•Long term: money you will not need for 10+ years.

For short term money, you should choose safe investments.

For mid term money, consider a balanced fund.

For long term money, choose growth investments, like index mutual funds.

Keep in mind, even if you will need income from your investments within a few years, your time horizon is your life expectancy, so a portion of your investments would still be allocated toward growth.

To invest with discipline, you must understand what investments provide which results, and combine them in the right proportions.

Like cooking, if you know what you are doing, when you put the ingredients together in the right proportion, you get an outcome that you are happy with. Once you have the recipe right, all you have to do is follow it.