6 Steps to Reach Financial Freedom: Step 2

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Determining Long-Term Goals

Long-term goals are generally defined as those that can be achieved over your lifetime. Paying for a child’s education, buying a home, and planning for retirement are all examples of long-term goals. You can best prepare for long-term goals by:

  • Adopting a practical lifestyle that stays within your means
  • Investing the same amount of money each month
  • Obtaining investment education to instill the confidence to weather periods of market decline
  • Practicing the discipline to continue investing regularly even when share prices drop

Long-Term Goals
Most people have fewer long-term goals than short-term, but these objectives are larger in scale and require continued commitment. For example:

  • Paying for children’s college education
  • Funding a long and active retirement

Investing Strategies

  • Dollar cost average. Invest the same amount of money each month, buying more shares when prices are low and fewer shares when prices are high–resulting in a lower cost per share over time.
  • Diversify. Spread your money across different securities, thereby minimizing your risk exposure and increasing your chances that one or more of the securities will perform well at any given time.
  • Asset allocation. Approximately 91% of your investment portfolio’s performance is determined by how your assets are allocated, so it’s important to allocate your money across different asset classes, such as stocks, bonds, and cash–as opposed to simply diversifying holdings within one particular asset class.

Investment Selection
With long-term goals, you can be more aggressive about where you invest your money since there will be time to recoup any losses and take advantage of bargain buying during down markets. The following are your basic choices:

  • Stocks: represent ownership in a company and generally offer the best growth opportunities over the long term
  • Bonds: represent your loan to a government or corporation and generally offer steady, fixed income
  • Cash: represented by short-term instruments, providing more downside protection for your investment but less opportunity for growth

As a general rule, riskier investments offer higher returns. However, by investing in all three categories, you combine riskier investments (stocks) with moderate-risk investments (bonds) and low-risk investments (cash). This strategy maximizes your return potential while minimizing your overall investment risk.

 
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