There are a lot of choices when it comes to investments. Stocks, bonds, cash, and then you have their derivatives, Mutual funds, ETFs, and CDs. Just to name a few. So how do you know which type of investment or investments are right for you? It’s important to remember why you were investing in the first place. Keep sight of the big picture. Here are a few things to keep in mind when deciding on an investment strategy.
Know your Goals.
Money is just a means to an end, so ask yourself “what is it that I'm I trying to accomplish?” Once you have a clear vision of what it is you want the money to do for you, then you can start filling in the details like, what is the time frame you are looking at? Is your goal 5 years from now or 30? Then you need to consider, if you are not able to save enough on your own in the time frame that you are aiming for, would you, extend the goal, or increase your exposure to risk for the possibility of a better return? There are no wrong answers, but I can tell you that if you’re honest with yourself, you will save a lot of stress in the long run.
To Tax or not To Tax
To promote savings the government allows you to put money into certain types of accounts that give you special tax advantages. The most common are IRA's or 401k but there are many many others. Not all have to do with retirement. Some are earmarked for Education (529 Plan, Coverdell ESAs ) The benefit is, that the money you contribute grows tax deferred and can be deducted from your earned income. Then you have their ROTH counterparts, for which you still get tax-deferred growth, but instead of taking the tax deduction now, you don't pay any taxes later. These types of accounts have different rules and regulations that need to be taken into consideration. For this article, I wanted to let you know that they exist. If you would like more information on the specific types of accounts feel free to follow the links.
Find The Right Fit.
So we have figured out how much money you need, how much you can save, and the type of account. That brings us to the amount of interest that you would need to earn to make up the difference. It’s time to pick some investments! If you’re looking for growth, stocks are the way to go. Just remember the greater the growth potential the greater the risk. If income is what you’re after, then bonds might be a better fit. Often a little bit of both is a good idea to balance out the portfolio. Putting together a mix of different also known as asset allocation is a way to try and maximize return while lowering risk. in what increments would again depend on the goal. If you’re just starting out investing, then mutual funds or Exchange-traded funds (EFTs)might be a good way to get diversification in a portfolio, as they can hold many different stocks, bonds, or both. Depending on the objective of the investment, and they usually have an inexpensive share price.
Live the Dream
I hope you found some of this information useful and if I could leave you with anything it would be this. No one investment is right for everybody. Everybody has their own goals, dreams, and financial situation, you should pick your investments according to yours. For long-term goals remember your investing for 5 years, not 5 min (insert time frame). Down markets happen and are usually great buying opportunities.
Thanks
Tom