Choosing investments: seven key principles strengthen portfolios.

• Author: Weatherholt, JoEllen
• Position: FINANCE

No one knows for certain when we'll see the next bull market, but inevitably, it will come. As individuals cautiously dip back into the investing pool, it's important that we take steps to protect our portfolios from the kind of thrashing they took last fall. Seven key principles should be incorporated into every investment plan for private investors to maximize the chance of reaching their financial goals.

KNOW YOUR NUMBER

Your number is the amount of cash or cash equivalent investments that you need to feel comfortable sticking to your long-term investment plan. Difficult market conditions often lead to fear-based investment decisions, which we all witnessed when many investors parked their assets in highly liquid cash accounts after the market imploded. However, having enough money specifically set aside to cover 12 months of living expenses can help reinforce your ability to ride out cyclical market downturns without losing sight of your long-term plan.

YOUR TIME HORIZON MAKES ALL THE DIFFERENCE

Your time horizon incorporates the multiple timelines for each of your investment goals. All things being equal, you can typically afford to take on more risk if you have a longer time horizon, since you'll have more time to accumulate savings and replenish any losses. The shorter your time horizon, the fewer risky investments you should hold in your portfolio. As a general rule of thumb, if you're planning to tap into your investments within five years, you probably shouldn't have meaningful exposure to riskier asset classes such as stocks. Planning well for your time horizon also means being mindful of the maturity dates and lock-up periods for investments such as bonds and alternative assets. Careful attention to the fine print and good planning can help protect you in the long-run and can keep you on course with your investment objectives.

DISCOVER THE MIX OF INVESTMENTS SUITABLE FOR YOUR PERSONAL CIRCUMSTANCE

Related to understanding your time horizon, you probably don't have just one financial goal--you have several. Each of these goals--whether it's funding your child's college tuition, building a sizable nest egg or leaving behind a charitable legacy--should be considered individually. The idea is to create a comprehensive investment strategy that considers your various financial goals, appetite for risk, income needs, time horizons, tax concerns, existing assets and family situation. This approach recognizes that you have more than one...