Investing has been attracting the attention of people who want not only to secure their savings, but also to multiply their capital and achieve greater financial independence. While the market is full of stories of spectacular successes and severe failures, the most important truth is that investing is a process — not a one-time event. Every step, from defining your goals to choosing a time horizon, requires reflection and informed decisions.
Define your investment goals
This text is the first part of the “Know Investing” series, the aim of which is to guide you through the most important elements of building a solid investment foundation. In this episode, we’ll look at three key aspects: how to define investment goals, how to develop your own plan, and why it’s so important to set a time horizon.
The first and absolutely fundamental step is to answer the question: why are you investing? It may sound trivial, but the lack of a clearly defined goal is one of the most common causes of investment failures. Imagine a person who buys stocks “because they’re growing” and sells them when “something is happening in the market.” Aimlessly, decisions become chaotic and devoid of logic.
Investment goals can be divided into several categories:
- Short- and medium-term – e.g. collecting your own contribution for an apartment within 5 years, financing children’s education or financing a larger purchase.
- Long-term — retirement security, building an income-generating passive portfolio or leaving wealth for future generations.
- Special – e.g. investing in order to diversify business activities or hedge currency risk.
Clearly defined goals allow you to choose the right financial instruments. A person who prioritizes security and stability will choose different assets than someone who accepts more risk in the name of higher rates of return. Goals are therefore a compass — without them, even the best strategy loses its meaning.
Develop your plan
Once you know what you want, it’s time to create an investment plan. It is a document that should combine both your goals and practical principles of operation. The plan does not have to be complicated, but it must be coherent and feasible.
Elements of a good investment plan:
- The level of accepted risk – are you ready for temporary drops in the value of your portfolio? And if so, to what level?
- Asset allocation strategy – i.e. the proportions between stocks, bonds, real estate, raw materials or cash.
- Rules for regular investing – e.g. monthly setting aside a certain amount regardless of the market situation (the so-called dollar-cost averaging).
- Rebalancing policy – what will you do when the proportions in your portfolio change? How often will you adjust your asset structure?
- Emergency procedure – how will you behave in the event of sharp declines in the markets?
The plan should be your signpost. In moments of euphoria or panic, it will allow you to make decisions based on logic, not emotions. Remember: the market can be unpredictable, but consistently executing your plan increases your chances of long-term success.
Set a time horizon
The time horizon is the period for which you plan to invest your funds. Contrary to appearances, this is one of the most important factors that affects the choice of financial instruments and the level of risk.
- Short horizon (up to 3 years) – in this case, the priority is to protect capital. Here, deposits, short-term treasury bonds and money funds dominate.
- Medium horizon (3-10 years) – it is possible to gradually increase your exposure to stocks or equity funds, but you should still be very careful about fluctuations.
- Long horizon (over 10 years) – time works in the investor’s favor. History shows that stock markets tend to rise over a decades perspective. This allows you to take on more risk by investing, for example, in ETFs, global indices or real estate.
Why is the horizon so important? Because the market can be volatile. Short-term losses can be painful, but if you’re investing for 15-20 years, you have time to make up for them. The short horizon, on the other hand, requires tools that are more stable and predictable. Matching your assets to the time you’re willing to wait is the foundation of safe investing.
Investing is the art of patience and consistency. Before you choose a specific asset, you need to know why you are doing it, how you are going to do it, and for what period you want to commit your funds. Goals, a plan and a time horizon are the three pillars on which the entire further strategy is built. This is just the beginning of the road. In the following parts of the series, we will look at each asset class in detail and consider how to combine them into a portfolio to achieve a balance between risk and potential return.