A solid investment strategy will take into account your financial goals and their time horizons, your risk tolerance and the money you have already saved and invested. Unlike money in savings accounts, which over time may be vulnerable to the effects of inflation, or loss of buying power, money you invest typically has the potential to be worth more as time goes by. This is the case because, over the long term, investments have historically provided a higher rate of return than savings accounts.
At the same time, investing carries more risk than saving – often many types of risk – which means you can lose some or all of the money you invest. Returns are not guaranteed and the money you invest is not insured. This makes it essential to consider an investment’s objectives, risks and expenses carefully before you buy it.
You can invest in many ways to build your wealth and meet the financial goals you have for the future. The more you know about your investment choices, including the return they have the potential to provide and the risks they pose to your investment principal, the wiser the decisions you can make about what’s appropriate for you. Working with an investment professional at every stage of the process, from setting goals to tracking your progress toward meeting them, can provide the guidance and encouragement you need to invest successfully.
One of your most important goals as an investor should be to build a well-diversified investment portfolio that can produce the investment returns you expect, given your tolerance for risk.
When you invest, it’s important to understand the relationship of risk and return.
One way to help manage the risk and volatility of your investment portfolio is to allocate your money across a number of different asset classes as opposed to having all of your money invested in one asset class.
Diversification is the investment equivalent of the old saying: “Don’t put all your eggs in one basket.”
Reinvesting your earnings by putting them directly back into your account can be a powerful way to realize substantial investment gains over longer periods of time.
Stocks are an equity investment, which means that when you buy stock in a corporation you become a shareholder and actually own a part of that corporation.
Bonds are debt investments. When you buy a bond, you’re lending your money—the principal you invest—to an entity—the bond issuer—that needs cash.
Cash equivalents, the third major asset class, are short-term investments on which you earn interest.
When you invest in a mutual fund, your money is pooled with money from other investors to buy a portfolio, or group of stocks, bonds or other investments, known as the fund’s underlying investments.