Choose the Right Investment
Money doesn't grow on trees, but it can grow in a variety of ways when it's invested properly. Investments help you grow your assets because, over time, they strive to appreciate in value.
Because investments are subject to external forces - such as stock market fluctuations or varying interest rates - the returns they offer can vary. What's the best investing strategy? It depends on how much you're investing, how much risk you're comfortable taking, and your investment goal or objective.
Begin by asking yourself two crucial questions:
- How much can I afford to invest?
Before you begin to invest, review your budget to evaluate just how much money you need to keep in reserve versus how much you're prepared to move into investments
- How much risk can I handle?
Many investors begin investing by putting money into conservative vehicles such as Treasury bonds or CDs where the rewards are predictable but not dramatic. Others dive right into higher-risk areas, like growth stocks where the returns could be very high-or very unpredictable. Most financial advisors suggest a mix of strategies depending on your objective and life stage.
For example, if your retirement is 30 years away, you can afford to take more risk in the stock market as you have a longer amount of time to withstand volatility. But if you are retired, you should choose a more conservative investment strategy since you'll most likely need access to these funds.
Choose the right investments
One size doesn't fit all when it comes to investing. Once you determine your appetite for risk and how much you can afford to invest, answering these two questions will help you choose the investment strategy that's right for you:
- Will I get good returns?
Since past performance is no guarantee of future gains, it is important to do some historical performance research. To evaluate whether or not your investments are producing the best possible gains, it's worth studying them in context by reviewing indexes and ratings, annual reports, and performance data.
- What am I investing for?
You should always review your financial goals before choosing investments. If your retirement is 20 years away, you can afford to take more risk. But if you are saving for a down payment on a home, you probably don't want to risk losing principle and will most likely select a conservative and liquid savings vehicle.