Rules to Invest By
- If you are investing for retirement, consider funding your 401k plan or opening an Individual Retirement Account, or IRA. Money you invest in your retirement plan comes from your pretax dollars, which lowers your taxable income during the year you contribute it to the plan. Moreover, money inside your account is allowed to grow tax-free until you retire and begin to withdraw it.
- Regardless of how solid you believe a company is, disaster can always strike. In 2008, for instance, Bear Stearns, a solid Fortune 500, fell from $30 a share to $2 in a matter of just a few days. Thus, it is important to spread your investment dollars over a wide range of stocks and bonds. This will reduce your risk by reducing your investment exposure to any one company. You can easily diversify by investing in a mutual fund, which is a basket of stocks and bonds you can buy shares in.
- Over time, stocks have historically outperformed all other investment classes. Since 1928, stocks have earned an average of more than 11 percent per year, according to New York University. Consider investing in stocks if you have at least five years before you need your money, "The Motley Fool" suggests. While stocks do better over time, they can underperform or even lose money from one year to the next. Thus, if you need your money in the next five years or less, bonds, money market accounts and government treasuries hold their value more consistently, making them a less risky choice for your short-term needs.
- Investing regularly can have a significant impact on the performance of your investments over time. For instance, assuming a 10-percent annual rate of return, if you invested $10,000 today, in 30 years your portfolio would grow to $174,494, which is a substantial amount. However, if you were to invest an additional $100 each month, your investments would be worth $391,626 over the same period of time. Investing a small amount regularly in this case gives you an increase of more than $200,000.