Managing Your Investment Portfolio: Part One
Goal Setting and Getting Started

by Gerald Townsend, Financial Editor
January 2010

During 2009, Boom! ran a series of articles on "Financial Planning 101," which covered the basics of personal financial planning. In 2010, we are starting a new series on "Managing Your Investment Portfolio." Each month we will discuss a different component of this process — from looking at your financial resources and the current economy to developing an asset allocation plan and selecting specific investments. It promises to be an interesting journey.

This month’s topic is on setting your investment goals and getting started.

I know your first inclination is to ignore this part of the process. It is much more fun to start talking about a hot stock or a new mutual fund, but this is absolutely the most important part of developing and managing an investment portfolio — so pay attention.

Investments are part of your overall financial planning. You are making investments for a purpose — what is it? You may have several distinct goals, such as funding a secure retirement, accumulating funds for your child’s college education, paying off your home mortgage, starting a business, etc. In that case, each one of those goals has a different time frame and cost. Write down your financial and investment goals and quantify them, as much as you can. How much money do you actually need for retirement or education or for the business? When do you need it? How much will you be able to invest for this goal each month?

Something magical happens when you move beyond fuzzy dreaming into the reality of writing down goals, times and costs — so I encourage you to be as specific and detailed as you can.

Consider your personal circumstances. I believe we should stretch ourselves and dream big, but not unrealistically. Set goals that are achievable within the limits of your income and family situation.

Next, give some thought to both your financial risk capacity and emotional risk tolerance.

Your financial risk capacity is based on your income and assets and is a measure of how much risk you can financially afford to take. The greater your income and assets, the more risk you can endure, which isn’t to say that you should or need to take on the risk.

Your emotional risk tolerance is determined by how you emotionally respond to the risk and rewards of investing. For most people, the pain of losing money exceeds the joy of making money. What is your "ouch" point? Are you much more comfortable with modest returns — and modest losses — than with the prospect of much higher returns couple with higher losses?

How much return — and risk — do you actually need to accomplish your financial and investment objectives? If you could achieve most of your financial goals through consistent funding and a 5% rate of return, why are you shooting for a 10% rate of return? Perhaps just the thrill of the chase?

On the other hand, if your financial goals require a 7% return and you are investing in such a way that makes that level of return not likely, you are faced with some tough choices. You must start funding your goals much heavier, reevaluate your goals, or rethink your investment strategy.

Finally, while you are setting goals, you need to develop realistic expectations. Investments don’t deliver high returns without high risk and returns often fluctuate wildly year to year.

Ultimately, while setting your financial goals, your personal goal is to "Know Thyself."

Gerald A. Townsend, CPA/PFS, CFP^®, CFA^® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com

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