Knowing where and how to invest your hard earned money can be very difficult, and making a wrong move could set your plans back many years. Whether your goal is to save up for a first home, provide a quality education for your children or fund a comfortable retirement for yourself, it is important to know your options.
Time Horizons Matter
Generally speaking, the longer your time horizon, the more risk you can afford to take. That means that those with decades to go before retirement may want to keep a substantial portion of their money in the stock market. Even though the stock market is subject to wild swings and periods of steep declines, over the long haul, stocks still provide superior returns compared to other financial vehicles. But as your time horizon shrinks, it is important to reassess your exposure to the stock market and make adjustments as needed. Moving some of your investments into safer instruments like certificates of deposit and U.S. Treasury-backed instruments can protect you in the event a major bear market coincides with your planned retirement date.
Individual stock investments are generally considered to be the riskiest of all mainstream investments, but good stock pickers can also pocket some big rewards. For most people, however, buying individual stocks can be a big risk, and it is generally not a good idea to put more than 4 to 5 percent of your money into any one stock. Limiting exposure to any one stock is a good way to reduce risk and cushion your portfolio in the event a given stock collapses. With household names like AIG and Bank of America now nearly worthless, it is easy to see why controlling individual stock risk is so important.
When mutual funds first came on the scene many individual investors were intrigued by the concept of pooling the money from small investors and using it to buy a large basket of stocks. The mutual fund concept allows even the smallest investors to achieve instant diversification, reducing the risk of buying individual stocks. Even so, it is important to look at the riskiness of the fund itself--some actively managed funds can be quite a bit more volatile than the stock market as a whole. When choosing a mutual fund it is important to look at its beta co-efficient. The beta rates how risky the fund is compared to the stock market as a whole. Investors who want to learn more about beta coefficients and other investment terms can find lots of information at Investopedia.com.
Exchange-traded funds (ETFs) work much like mutual funds--with one important difference. Unlike mutual funds, which are priced at the end of each trading day, ETFs can be bought and sold in real time during the day. This allows investors to choose a price at which they want to buy and sell--an important advantage over mutual funds. ETFs started out as a way to track the major indexes; the popular Standard & Poor's 500 index can be tracked with the ETF trading under the ticker symbol SPY. But today, there are ETFs that track virtually every market sector, including single country funds and even commodities.
Bonds are often considered safer than stocks, and high-quality bonds can provide stability. Even so, it is important for investors to keep in mind that the value of bonds has an inverse relationship to interest rates. This means that as rates rise, the value of the bond goes down, and as interest rates fall, the value of the bond goes up For investors who simply want to collect the interest and hold the bond to maturity, this should not be an issue, but investors who need to sell bonds before they mature may find themselves getting less than they paid.
The Safety of Treasury Instruments
Investors who are looking for rock-solid stability and safety may want to look to the government for their investments. The safety of Treasury bonds, notes and other instruments is certainly not in doubt. Investors who want to learn more about Treasury investments can go to the Treasury website at www.Treasury.gov.
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