Your investment mix is your personal blend of cash, stocks, and bonds – how big a slice is each in your investment pie? The right mix for you depends on several things – your goals, your time horizon, and the amount of risk you are willing and able to take.
- Know the difference between savings and investments.
Savings is cash set aside for short term goals, goals that are less than three to five years away. Savings are for goals that you don’t want to risk losing money. Examples would be for an emergency fund, a vacation, college tuition for a high school aged student, and money set aside for maintenance and repairs of your home and cars (at a minimum, enough to meet your deductibles if you have a claim). Savings are also considered liquid, meaning you can access them quickly, without a loss in value.
Investments, for the sake of this blog, are stocks and bonds, either individually or in mutual funds and ETFs (exchange traded funds). These are financial assets that one buys with the expectation that it will be worth more in the future and may provide income. While stocks and bonds are generally easy to sell, there can definitely be a loss in value, depending on when you sell, so they are not as liquid as cash is.
Investment goals can often be divided between income and growth. Generally, one looks to bonds for income and stocks for growth, but with the current low interest rates, that can be challenging. Dividend paying stocks offer income, but with more risk than most bonds.
- Know your time horizon.
The longer your time horizon, the more risk you can take by investing rather than saving. The value of stocks and bond go up and down, sometimes by a lot! While the historical trend is for stocks and bonds to grow in value, at any particular time the values can fluctuate. That’s why we recommend investing in stocks and bonds only when your time horizon is greater than three to five years.
- Know your risk tolerance.
While our goal is to educate our clients so they feel comfortable taking appropriate risks (investing in stocks and bonds for long term goals), you know yourself and have a sense of how much you are emotionally able to stand by and watch your investment values go up and down. If you can’t sleep at night because you are worrying about losing money, then you would want a more conservative investment mix.
- Know your risk capacity.
How much can you afford to lose and still meet your goals? This involves looking at the numbers and your flexibility. In the case of retirement, are you willing to work longer or spend less if necessary? You may be willing to take on more risk in that case. If not, then your preferred investment mix may need to be more moderate.
There’s a lot of jargon in the financial services industry, so another way of saying investment mix is asset allocation. Here are some examples of allocations or investment mixes. This does not include cash that is considered savings. Note that within both bonds and stocks are many subcategories – the topic for another blog!