Time Frames And Wealth-Building
Time Frames And Wealth-Building
Robert Pagliarini, MSFS, CFP (Author and Financial Planner) gives expert video advice on: What's the best strategy to gauge my investment time frame?; Should I invest differently for a 'sprint goal' versus a 'marathon goal'? and more...
How should my time frame impact my investments?
My theory is that time frame is everything when it comes to investing. A lot of people think of risk tolerance, and all that. I say time frame is more important, because when you want to achieve your goal, that really dictates how aggressive or how conservative you should invest to reach that goal.
What's the best strategy to gauge my investment time frame?
There are five different time frames that you should consider when you are looking at your financial goals. The first is immediate. Those are financial goals, where you're going to achieve them in less than a year. Then there is close - those are goals that you want to achieve between one and two years from now. Then there are approaching, which are goals between two and four years, intermediate goals between four and eight years and finally the distant goals. Any goal that you have that you want to achieve that's more than eight years away would be considered a distant time frame.
What are 'cash investments'?
Cash investments are things like CDs or money market funds, things that are really secure that you know the money's not going to go down in value. For example, if you buy a stock today, it could actually go down tomorrow. With cash or cash-like instruments, like money market accounts and CDs, the money you put in today will be there tomorrow. It won't go down.
How should I invest on an 'immediate' time frame account?
If you have a goal that you are going to achieve in, let's say less than a year, that's an immediate time frame goal. The good news is that you are going to get your goal pretty quickly. The bad news is that you are probably not able to invest, because you are so close to needing the money that if you invest it you might lose it short term. If you have an immediate time frame goal, my suggestion is stick it in a CD or a Money Market Fund that is really really safe and conservative. You'll know when you need the money in less than a year, that it'll be there.
How should I invest on a 'close' time frame account?
If you have a close time frame, a goal that's maybe a year or two away, you're able to invest a little bit because you have a longer time frame. The recommendation there is maybe to have 10 to 20 percent in cash, have 60 to 80 percent in fixed income, meaning bonds - things that produce income for you. Really safe, secure, and conservative. Then, possibly maybe five percent in stocks, to give you that extra little boost.
How should I invest on an 'approaching' time frame account?
With an approaching time frame goal, it's about two to four years away. The advantage there is that you're far enough away where you can actually start to invest a little bit more. With this kind of a goal, maybe look at 2 to 5 percent in cash, maybe 50 to 70 percent in fixed income, and possibly 10 to 30 percent in stocks.
How should I invest on an 'intermediate' time frame account?
With an intermediate time frame goal, it's about 4 to 8 years away. It's a fairly long time, so you can actually invest a little bit more for this kind of a goal - maybe 1-2% in cash, you don't really need a whole lot. And probably 10 to 30% in bonds; fixed income. And the rest you can do in stocks.
How should I invest on a 'distant' time frame account?
With distant time frame goals, eight years plus. The bad news is that you're not going to hit your goal very soon, it's going to be more than eight years. The good news is that you can invest these for maximum success. Because you have such a long time frame until you need that money, you can invest it fairly aggressively. So, maybe 1 to 2 percent cash, ten to twenty percent bonds, and the rest, 70, 80 percent you can just put in stocks.
What is a 'sprint goal' versus a 'marathon goal'?
There's a difference between a sprint goal and a marathon goal. A sprint goal - picture an Olympic athlete - they say "mark, set, go, BOOM!" They run and they're over with very, very quickly. Now, compare that to a marathon, where they say "On your mark, set, go", and it's a much longer time frame to finish the race. With the sprint goal, that means that the money that you've saved, you're going to use it immediately. An example would be: you want to take your kids to Disneyland. You save money every month. You've amassed the amount of money that you need and, then, BOOM, you spend it all taking your kids to Disneyland. That's a sprint goal - you've used the money really quickly. Now, compare that to a marathon goal. The marathon goal is like retirement - that's the best example. You put money aside every month for years and years and years, then you retire. But you don't spend the entire retirement account the day you retire; it's supposed to be there for years and years and years. A marathon goal is one where you spend the money over time rather than just instantly.
Should I invest differently for a 'sprint goal' versus a 'marathon goal'?
The sprint goal, again, everything comes back to the time frame of the goal. When do you need the money? With a sprint goal, you need the money on a particular date. You need ALL of the money on that particular date. You can invest that based on the percentages I discussed a few minutes ago. With a marathon goal, what you don't want to have happen is , let's say 20 years from now you retire and you have a million dollars in your retirement account. You don't just want to keep that all in cash, because it just wouldn't grow very well for you. With the marathon goal, you want to invest that for growth, because it's such a long time frame when you'll be using the money, but also somewhat conservatively. It's a little tricky.