Five Things You Need To Know When Deciding How To Invest For Retirement
Successful investors are good at finding opportunities.
Successful investors buy low, sell high, and keep emotion out of their decisions.
Sound easy? Like most things, it sounds easier than it is.
Fortunately, you can get help (as we'll discuss in a moment.
) For now, where should you invest your money? If you're an inexperienced investor, it might make sense focusing on mutual funds first - that way you can take advantage of the skills and expertise of professionals.
(Of course, you can also choose to buy individual stocks - but that's a discussion for another time.
) Whether you invest your funds through a 401(k) or as a separate investment, there are tons of choices.
Let's look briefly at a few of the major investment categories: Stock mutual funds are portfolios of company stocks.
When you buy a share of stock, you buy a small piece of ownership in the company.
A stock mutual fund buys shares of stock in a variety of companies in the hopes of getting a great return on investment in aggregate.
A stock mutual fund may own shares of stock in hundreds of different companies.
The price of a share of that mutual fund is based on the value of all the stocks owned by the mutual fund.
When share price increases in value, the price of the mutual fund increases.
Since mutual funds tend to own hundreds of different stocks, no one stock causes the share price to increase or fall dramatically.
If it helps, think about a stock mutual fund as one way to have a professional make decisions about how to invest your money.
Bond mutual funds are like stock mutual funds except they invest in corporate or government bonds.
A bond is like an I Owe You.
You purchase the bond and a company or government entity promises to pay you back your investment, with interest.
Bond mutual funds focus on purchasing high-yielding bonds.
In general, a bond mutual fund is somewhat less risky than a stock mutual fund...
but not always.
Stable value accounts and money market accounts are typically made up of certificates of deposit (CDs) and U.
S.
Treasury securities like Treasury Bills.
Stable value accounts are very secure and offer small and steady growth.
You won't get rich overnight, but your money should be fairly safe from loss.
So what types of investment are right for you? Start by determining your goals and deciding how much risk you are willing to accept.
Determining your willingness to take on risk is a key factor.
Why? The answer lies in the premise of risk and return:
The longer you can stay invested (in other words, the longer until you retire), the more risk you can typically take on if your goal is to achieve higher returns.
For example, if you think you will need to start withdrawing money sooner rather than later, your willingness to take on risk should be lower, so you should probably choose investments like bond funds or stable value funds, since they tend to be less risky and provide relatively stable returns.
If you have a lot of years of investing ahead of you, say fifteen to twenty or more, then you can in all likelihood afford to take a few more risks with your money.
The longer your money is invested the more time you have to recover from losses.
Then think about your general feelings about investing.
Risk tends to create stress and anxiety.
Stressing over how your investments are performing is not particularly fun.
Think about what level of risk you are comfortable with and then make your investments with that in mind.
But keep in mind that most plans let you shift your money between funds a number of times each year - in some cases as often as you want - so if you change your mind about how to invest your money you can make changes to your investment allocations.
Investment decisions aren't forever.
Successful investors buy low, sell high, and keep emotion out of their decisions.
Sound easy? Like most things, it sounds easier than it is.
Fortunately, you can get help (as we'll discuss in a moment.
) For now, where should you invest your money? If you're an inexperienced investor, it might make sense focusing on mutual funds first - that way you can take advantage of the skills and expertise of professionals.
(Of course, you can also choose to buy individual stocks - but that's a discussion for another time.
) Whether you invest your funds through a 401(k) or as a separate investment, there are tons of choices.
Let's look briefly at a few of the major investment categories: Stock mutual funds are portfolios of company stocks.
When you buy a share of stock, you buy a small piece of ownership in the company.
A stock mutual fund buys shares of stock in a variety of companies in the hopes of getting a great return on investment in aggregate.
A stock mutual fund may own shares of stock in hundreds of different companies.
The price of a share of that mutual fund is based on the value of all the stocks owned by the mutual fund.
When share price increases in value, the price of the mutual fund increases.
Since mutual funds tend to own hundreds of different stocks, no one stock causes the share price to increase or fall dramatically.
If it helps, think about a stock mutual fund as one way to have a professional make decisions about how to invest your money.
Bond mutual funds are like stock mutual funds except they invest in corporate or government bonds.
A bond is like an I Owe You.
You purchase the bond and a company or government entity promises to pay you back your investment, with interest.
Bond mutual funds focus on purchasing high-yielding bonds.
In general, a bond mutual fund is somewhat less risky than a stock mutual fund...
but not always.
Stable value accounts and money market accounts are typically made up of certificates of deposit (CDs) and U.
S.
Treasury securities like Treasury Bills.
Stable value accounts are very secure and offer small and steady growth.
You won't get rich overnight, but your money should be fairly safe from loss.
So what types of investment are right for you? Start by determining your goals and deciding how much risk you are willing to accept.
Determining your willingness to take on risk is a key factor.
Why? The answer lies in the premise of risk and return:
- If you stay conservative and invest in stable value funds, you will receive lower returns but also face a lot less risk.
- If you purchase a mix of conservative and aggressive investments, you will face more risk but hopefully receive higher returns.
- If you invest aggressively you may receive higher returns, but you will face a lot more risk.
In general, the more you make the more you have to risk.
The longer you can stay invested (in other words, the longer until you retire), the more risk you can typically take on if your goal is to achieve higher returns.
For example, if you think you will need to start withdrawing money sooner rather than later, your willingness to take on risk should be lower, so you should probably choose investments like bond funds or stable value funds, since they tend to be less risky and provide relatively stable returns.
If you have a lot of years of investing ahead of you, say fifteen to twenty or more, then you can in all likelihood afford to take a few more risks with your money.
The longer your money is invested the more time you have to recover from losses.
Then think about your general feelings about investing.
Risk tends to create stress and anxiety.
Stressing over how your investments are performing is not particularly fun.
Think about what level of risk you are comfortable with and then make your investments with that in mind.
But keep in mind that most plans let you shift your money between funds a number of times each year - in some cases as often as you want - so if you change your mind about how to invest your money you can make changes to your investment allocations.
Investment decisions aren't forever.
