Your savings goals affect your investment strategy
The right investment strategy for you depends on your personal financial objectives. It's important to ask yourself questions such as, “What am I saving and investing for?,” “When do I need this money?,” and “How much risk am I willing to take?”
Investing aims to build wealth over time, so the answers to these questions will help you plan ahead to increase your odds of achieving financial success.
What are you saving for?
Different objectives can lead to dramatically different portfolio allocations, even for similar individuals. Are you saving to fulfill short-term financial goals, such as buying a house, replacing a car, or going back to school in the near future? In those cases, you'll likely need to invest conservatively to reduce the risk that you won't have enough funds to cover these near-term expenses.
On the other hand, if your main goal is to save for retirement a few decades away, you may be able to invest more aggressively. While there could be bear markets (markets in which stock prices are falling) and recessions (periods of temporary economic decline) between now and your retirement that cause your investments to lose value in the short term, your long-term horizon means you have time to recover and eventually gain new ground.
Your portfolio should consider unexpected expenses too
In every case, it's also important to prepare for unanticipated rainy days, such as when your car breaks down, when your washing machine is on the fritz, or when you need to make that copay at the doctor’s office. As we always hear, we should expect the unexpected!
Having emergency cash, or some percentage of your portfolio, in less risky assets, such as money market funds, can help to protect you in these situations. Knowing your monthly expenses and aiming to save enough to cover the unexpected is a helpful approach when thinking about building a rainy day or emergency fund.