You want to choose investments that will meet your financial goals. To do that, it’s important to understand what your investment choices are and how different types of investments work. Risks and potential returns vary greatly from investment to investment.
Evaluate Your Risk Tolerance and Needs
As a general rule, the younger you are and the more time you have to reach a financial goal, the more investment risk you can afford to take. That means, for example, when you’re in your twenties and just starting your career, you may be able to take a more aggressive approach to investing for long-term goals. Aggressive investing means choosing investments that have the potential to provide greater return over an extended period. But these investments also expose you to more risk in the short term because their prices are volatile, which means they might move up and down rather quickly within a short period.
On the other hand, when you’re in your late 50s or 60s, you’ll probably want to be more cautious about taking on investment risk, since your portfolio may not have a chance to recover from a market downturn before you need to start drawing on your retirement assets. When you retire, your goal is not only providing continued growth while taking limited investment risk but also ensuring that you have a stream of income that can cover a portion of your living expenses.
But these are just guidelines. No single approach to choosing investments will work for everyone or will be right for every situation.
Do your Due Diligence before investing
What does make sense for all investors is concentrating on investments that share these important characteristics:
- There’s lots of information about the investments that will make it easy for you to understand and evaluate. Regulators require that certain information be disclosed to investors through documents such as mutual fund prospectuses, corporate filings for stock issued by public companies that trade on the major stock markets and prospectuses or offering statements for bonds. In addition, you can find a wealth of real-time and historical market data for stocks, bonds, mutual funds and other securities on FINRA’s Market Data page.
- The sales charges for buying and selling the investments, as well as any fees for selling within a certain time frame, should be clearly explained. FINRA’s Fund Analyzer can help you compare up to three different mutual funds, classes of a single fund or exchange-traded funds.
- The investments should be registered with the SEC or your state’s securities regulator, and the salespeople who sell them are licensed by FINRA. Use the SEC’s EDGAR Databases to check whether the investments are registered, and use FINRA BrokerCheck to confirm that a broker is licensed to sell securities.
- Thinly traded stocks or securities that aren’t listed on a major exchange are rarely a good idea for most investors.
- You must understand the risks of the investment and how it works.
(FINRA = Financial Industry Regulatory Authority, www.FINRA.org)
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