There are all kinds of quality investments out there. As you build your portfolio, one of the biggest challenges is deciding how to invest your money when you have so many options to choose from.
Suze Orman brought up this subject on a recent episode of her podcast Women & Money, and she shared an important tip for every investor. When you invest, “you have to know the goal of your money,” says Orman. Here’s what she means and how you can do this.
Why knowing your goals is a must when investing
Each type of investment has its pros and cons. As you’d expect, there’s no single investment that’s right for every situation. Most investments are well-suited to some financial goals, but not as useful for others.
On her podcast, Orman mentioned how she had previously recommended a stock with a very high dividend payment to a couple. By replacing another stock in their portfolio with her recommendation, the couple could make nearly $10,000 per year more in dividends. Orman clarified that she wasn’t telling everyone to go out and buy the stock, but many of her listeners did.
This is a good example of a common dilemma for investors: Growth stocks versus dividend stocks. Growth stocks are companies that raise revenue and profits faster than than the average. Dividend stocks are companies known for paying generous dividends, like the one Orman recommended. Because these two types of stocks are so different, the right option depends on your goals and age.
At first, a stock with a high dividend may seem like a great choice to increase your income. And it could be, if you’re in a position where you could use more passive income, such as when you’re retired.
But dividend stocks generally don’t increase in value as much as growth stocks. Also, dividend payments raise your taxable income. Those are serious drawbacks for younger investors who want to maximize their wealth-building. If you’re in that position, growth stocks would likely be more appropriate.
How to match your investments to your financial goals
When deciding how to invest your money with your stock broker, think about your major financial goals and how soon you want to achieve them. Based on those goals and their timelines, you can pick out the investments that are the best fit for each one. As a general rule, the longer you have to save for a goal, the more you should prioritize growth in your investments.
One of the most common long-term goals is saving for retirement when you’re early in your career. Another example would be building a college fund when your child is a toddler. In both cases, it makes sense to fill your portfolio with stocks that have good growth potential. If you don’t want to pick individual stocks, you could opt for growth-oriented investment funds, such as:
Your goals will change as you get older, which is why you should review them and your investments regularly. For example, when you retire, making your money last is more important than growth. To do that, you’ll need to adjust your investments. You could shift some of your money to high dividend stocks, or you could invest more in bonds, since these aren’t volatile like stocks can be.
You can get solid performance with many types of investments. But to get the most from your portfolio, make sure to consider which investments match up best with your current financial goals.
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