All to often people care more about return or safety when considering investment options. What should be considered first and foremost is the needs of the investor. What is this money being saved for? How long will it be before the money is needed?
Potential returns and risks of individual investments are irrelevant until the investors objectives and goals have been clearly defined. For instance a S&P 500 index fund that will most likely avg 12% over the next 15 years sounds much better than a money market fund that will average 3% over that same period. This will hold true for many investors but not the high school student saving for college who will need the money in 18 months. That student may very well be disappointed when they withdrawal the entire account that has lost money because they bought in on a market down cycle. The student is better off with something safe because they can't risk a loss. On the other hand the recent college graduate who just found a job and wants to start saving for retirement will be better off in the stock market.
Determine Your Financial Objective
Understanding investor objectives can be tricky. Here are some great questions to answer when coming up with the objective of financial planning.
- How much money is needed?
- When is the money needed?
- What is the likeliness that an emergency or other need will come up and the money will be needed early?