investor-learn-basics

Learn and Plan:
Setting Goals

Whether it's a home, a child's education, your own retirement, or another aspiration that requires personal savings, you've identified a life goal. And reaching that goal requires more than just putting the money aside. You'll need to invest it, putting it to work so it earns and grows over time. How much it has to grow—and how quickly—is an important first step in meeting your goals.

See also: Basic information about Mutual Funds

Understand the risks

Two types of risk are particularly important to investors:

  • Market risk, the chance that your investments will lose value because of the ups and downs of the stock or bond market, and
  • Inflation risk, the chance that your investments won't stay ahead of inflation.

Generally, the more time you have to meet your goal, the more market risk you can take on, and the less inflation risk. The less time you have, the less market risk you can take on, and the more inflation risk.

To see how time has historically moderated market risk, look at the illustration below. In the short term, stock market returns can be very volatile. But over time, they tend to moderate and to net out positively, providing a long-term average annual return over the past 50 years of 11%, according to Ibbotson Associates. (And remember: money can lose value over time because of inflation, so there is further motivation to invest in stock funds for the long haul.)

Fortunately, there are strategies for moderating both market and inflation risk:
Investments that expose your savings to less market risk are income and cash investments, like bond and money market funds. Their rates of return are generally lower than those of stocks and stock funds. But keep in mind that bond funds are not "stable value" investments, and their prices do fluctuate, generally declining as interest rates rise and rising as interest rates decline.

Investments that expose your savings to less inflation risk are growth investments, like stock funds. Their rates of return are generally higher than those of bonds and bond funds. Of course, stock funds, like the stocks they invest in, fluctuate in value with the ups and downs of the market.

Certainly, all investments involve some degree of risk, and it's important to understand the risks associated with any investment you choose before you invest. Your financial advisor can help with this process.

A note about the current economy

The financial crisis and economic recession that started in late 2007 have caused concern among many investors who are close to retirement or another financial goal. The decline in the value of virtually all stock funds and some fixed-income funds has naturally created some doubts about long-run investment success. However, as the chart below illustrates, the U.S. stock market has always retraced its bear market losses to turn positive in a recovery.

Of course, the amount of time needed to make up for losses varies greatly, as does the speed and depth of market downturns. The most extreme example is when the U.S. stock market lost more than 80% of its value beginning in 1929. It took 151 months to recover those losses. The equity market’s decline of about 40% from its peak in late 2007 through the end of 2008 was much less severe than the downturn during the Great Depression—although as of the first quarter of 2009 the exact end of the bear market was still undetermined.

Set goals for significant life events

Take a look at the "big picture" of your life and list what you expect to occur during each coming decade. Or, put specific goals on paper and make some assessments of their accompanying money goals.

Here are a few common goals and events, along with considerations that can affect money goals:

First job

  • If you're entering the workforce with a significant amount of debt, make a plan to pay it off.
  • Make a budget and stick to it (one that includes paying off debt if you have it). Once a year, adjust your budget to reflect the way you really live. A budget's no use to you if it's not realistic.
  • From the beginning, realize how important it is to have access to "emergency" cash. Many financial planners recommend having three months' salary available.
  • You've heard it before: Pay Yourself First! Paying off debt is one way of paying yourself. A second: if your employer offers a qualified savings plan (401(k), 403(b), etc.), begin participating as soon as you're eligible. Contribute at least the minimum required to receive any employer match that's offered. Your ultimate goal, of course, should be to contribute the maximum allowable.
  • If your employer doesn't offer a savings plan, start saving in an individual retirement account (IRA). Again, contribute the maximum allowable if possible.
  • Meet with your financial advisor!

Marriage or partnership

  • Look at your individual assets and debts. Decide whether to combine them or keep them separate.
  • Make your spouse or partner the beneficiary of your savings, investments, insurance, and other accounts.
  • Consider the longer-term goals you've both had and decide how they can be achieved together.
  • Decide whether you'll retain your own financial advisor, retain your spouse or partner's advisor, or find a new advisor. If you decide to interview potential new advisors, use the Calvert Advisor Finder® to find advisors in your area.

Adding to your family

  • Revise your budget to reflect your family addition.
  • Begin saving for your child's education in a college savings plan.
  • Add your child as a secondary beneficiary to your savings, investments, insurance, and other accounts.
  • Talk with your financial advisor about other investment options, given your financial situation (such as establishing a revocable living trust, UGMA accounts, etc.).
  • Meet with your financial advisor!

Changing your job

  • Meet with your financial advisor before you leave your current job.
    - If you have participated in your employer's qualified savings plan, learn what options the plan offers for your assets in the plan.
    - Consider rolling over plan assets into a qualified rollover plan to maintain maximum control and investment options.

Buying a home

  • Plan ahead. For example, if you hope to purchase your first home five years from now, you may have a rough idea of how much you'll be willing to spend and how much cash you'll need for the down payment. Use our Savings Calculator to see how much you might need to save each month and how much your investment might grow from investment returns, interest, and/or dividends. 

Losing a spouse or partner

  • Whether through divorce or death, losing a spouse or partner can involve many business and financial considerations. Because these considerations occur at a time when you may be emotionally stretched, be sure to consult with your financial and legal advisors for help.
  • Estate, inheritance, beneficiary, and other laws and policies can be very complex. Don't make decisions too quickly or without adequate professional advice. 
  • Be sure to change your beneficiary designations on your savings, retirement, IRA, and other accounts. This can be particularly important in the case of divorce to ensure the appropriate transfer of assets.

Retiring

Review our Retirement Basics page for a thorough discussion of issues and decisions related to retirement.

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