This step is probably the toughest part of the investing process: sitting down to figure out why you're investing, what you're investing for, and how much money you'll need to reach that goal. Your goals and your risk tolerance should then determine what your portfolio looks like.
Keep in mind that your goals and your stomach might not agree. You may find, for example, that the idea of losing 20% in one quarter makes you nauseated, but you need to invest aggressively to have a shot at accumulating the return you'll need to reach your goal. If so, you will need to compromise by accepting the risk, changing the goal, or saving more.
Time plays a part, too. If your goal is to retire in 30 years, you might be more willing to put up with short-term ups and downs if it means reaching your long-term goal. If you suffer a loss, you have time to make up for it. But if your goal is just five years away, taking on more risk might not be a good idea, because you have less time to make up for any losses.
Develop a Core >>