Investment decisions can be very challenging for people who don’t work in this field every day.
The sheer number of options available, both through employer retirement systems and by independent investments, is sometimes overwhelming. Making choices means doing research, and that starts with investigating returns of various options.
Know Your Investments
Before you look at a list of top CD rates, the best-performing mutual funds, or high-yield individual corporate stocks, you need to understand the differences between these investments. Certificates of deposit are conservative performers, but they are guaranteed performers.
Conversely, over the long haul, many stock market options can yield some very impressive growth. But through any given short term period of time, they could potentially lose a huge percentage of their value.
So as you begin to think about different investment instruments, keep that in mind. Now on to the other key factors in investment decisions.
The first question to ask is how long your investment is for. If you have a few thousand dollars that you’re holding for a purpose that will occur on a certain date, like college tuition, you want something that will generate a modest but definite amount of return. In this case, a CD might be a good choice.
If you are looking at your retirement options, you can tolerate higher-risk options because there will be time to recoup any losses that may happen. In your first years on the job, you can review high-yielding mutual funds and direct your savings that way. If a downturn a few years later takes place, you’ll lose value for a while, but when things improve – and they always have – you will recover those paper losses and get back on the right track.
As a rule, make your choices and stay put. Fees can erode your wealth. In your mid- to late working years, though, it will be time to reallocate. When you only have a few years left until retirement, you have less time to bounce back. Talk with your retirement advisor about directing new investments into safer short-term options like Treasury bonds.
Personal Tolerance For Risk
Some people prefer to play it safe even when the conventional wisdom says to stick your neck out. The bigger risk-takers may ridicule you if you’re not playing as fast and loose as they are, and their goals of higher financial gain may end up coming completely true.
But not every cost or benefit is measured in money. What is it worth to you to avoid sleepless nights spent worrying about the gambles you’re taking with your money? Perception is reality, and even if your course seems prudent to reliable advisors, the ultimate test is how you feel about it. If you are worried about your money, you are paying a very real cost–albeit a non-monetary one–for the risk you have taken.
The opposite is true as well. Some people love the thrill of logging onto a website and discovering their big risk has come through. There’s nothing wrong with that either, as long as their overall strategy doesn’t put them in the poorhouse.
The key message here is to use your head but not to forget about your heart. If you just aren’t comfortable with something, don’t do it!
Briefly, it’s important to hedge your bets in any investment. An investor who rolled the dice on Chrysler stock during its dark days of the early 1980’s could have quickly made a fortune. But if Iacocca hadn’t come through in saving the company, that money would have been gone. It would have been safer, in spite of the 20/20 hindsight, to have invested in several struggling companies in hopes of getting enough success to cover it.
This goes for all aspects of investing, not just companies. If you want to buy four CD’s, get them from four banks. That way, when the maturity dates arrive, you have four different players offering rates for rolling over for another period. Mutual funds function like a shopping cart; they represent several different stocks bundled together in a single investment tool, providing their own insurance against downturns. Some items in the cart may go up, others may go down. Overall, though, the value of the cart should increase.
There’s nothing complicated about investing, unless you choose to make it complicated. Those who make that choice can do very well, but you can succeed with a simpler strategy too. Get good information, follow these basic rules, and understand your goals for your money.