Choosing the Right Investments

Choosing the investment options means selecting financial investments that will provide the income you need to meet your future financial goals. Keep in mind, though, that those investments that do well for someone else may not be right for you. Deciding where to invest funds can sometimes be difficult; therefore, you need to understand how different types of investments put your money to work.

Difficulty: Moderately Challenging

Instructions

1. Define your investment goals. Age is a key issue. Typically, the younger you are when you begin to invest, the more investment risk you can afford to take on. When evaluating the various types of investment possibilities, age plays a significant role in determining one's financial goals. You also need to consider the timeframe required to meet those goals and the level of risk you are willing to take. Understanding the risks can help you to make more informed decisions. The more time you have to reach your financial goals, the more risk you can take.

2. Tailor your investment portfolio to your individual needs and financial situation. Short-term investments allow you to invest funds for fewer than 3 years. These are usually safe, low-risk investments that pay interest and can be liquidated quickly with little loss of cash value. Savings accounts, money market accounts and Treasury bills are good examples. Mid-term investments usually require a 3 to 5-year term of investment. This type of investment may include certificates of deposit (CDs). The larger the principal invested and the longer the term, the higher the interest rate paid. Long-term investments are those in which you invest funds for more than 5 years and may include stocks, bonds and real estate.

3. Plan for an annual retirement income of about 65% of the annual salary you are earning at the time that you retire. A lot will depend on whether you are looking to live a modest or more lavish lifestyle after you retire. But no matter what your overall financial goals, your portfolio should be diversified containing a number of mixed investments.

4. Choose a combination of investments, which will provide a steadier rate of returns. Again, the higher the risk you take on, the higher the potential returns. While all investments carry some level of risk, you may be able to minimize the risk. Just remember that low-risk investments have a low rate of return. Consider that the market always recovers. Even though stocks may be down now, financial experts advise that it's not a good idea to convert significant assets to cash. You should have some cash on hand, but at the same time, you don't want to lose the gains you've earned.

5. Ask yourself whether your primary goal is to increase your wealth or protect your retirement assets. Conservative investors pass up on earning potentially larger returns for the safety of a steady income. On the other hand, aggressive investors are willing to assume a much higher risk for the potential of earning greater returns on their investments. The key is to select investment options with which you feel most comfortable.

Tips & Warnings

• All investments have certain advantages and disadvantages. Although the stock market may have its ups and downs, stocks usually earn income over the long term. If stocks are too risky for you, mutual funds offer high growth potential with less risk. Mutual funds, which are funds made up of many individual investments, are liquid investments that allow you to get your money when you want it. Good for just about any investor, bonds provide a steady income by earning interest income. The longer the maturity period, the higher the interest rate will be.
• Despite how carefully you may choose your investments, keep in mind that all investments are subject to a certain degree of risk. Even if you consider the past performance of an investment beforehand, that does not guarantee the value of future returns. Investors must take into account interest rates and inflation. Long-term investments usually aren't affected adversely by inflation, as over the years, a company's performance tends to keep pace with inflation. This isn't the case when it comes to lower risk investments like Treasury bills. You may receive a return at the end of the year; however, inflation can reduce the real rate of interest earned.

Resources

• Search for an investment advisor.