Many “investors” start by focusing on the potential returns on their chosen investments - they put the cart before the horse.
And why not? The media constantly bombards us with siren song headlines such as “The 5 stocks you MUST own now!”, or “The 7 mutual funds that will make you rich over the next 10 years!”. But unlike Odysseus, we are destined to crash upon the rocks of failed investment ideas if we follow the sirens’ call.
In this short paper from Vanguard, a more intelligent approach is illustrated. Before deciding how to invest our savings, wise investors develop a plan. The financial plan, often developed with a competent investment advisor, starts with determining our values and goals. The next step is to identify our risk tolerance, resources, constraints, and time frame. From this we can estimate the required rate of return for our investments. Only then are we ready to build a broadly diversified, intelligently designed portfolio.
The seductive sirens’ call of desired (high) returns, without risk, bombards us from all sides. But as Odysseus bound himself to the mast to resist the sirens’ song of old, we anchor ourselves to an intelligent, realistic investment plan. If we do so, we are more likely to avoid the rocks of failed investment ideas and sail into the safe harbor of financial security.