Perhaps the greatest challenge in investing — whether you have lots of experience, you’ve just started, or you’re uncertain about how to begin — is finding the information you need to make financial decisions confidently. Among other things, that includes knowing how to choose what investments to buy, which ones to keep, and when to sell. The next challenge is translating your knowledge into action.
SAVE OR INVEST?
Investing isn’t the same as saving. When you save, you want to protect your assets and ensure that you’ll have enough money to cover financial emergencies. When you invest, your goals are more ambitious. You want to increase the value of your principal — the money you invest — or provide a source of income for the present or the future. In many cases, you may want to accomplish both goals. At the same time, investing means you have to be willing to accept risk, waiting out market downturns or facing the potential loss of some of your assets, to achieve the results you seek. That’s not the case with insured bank accounts, which virtually eliminate risk to your principal, but provide little growth or income.
The first step toward financial security is to recognize the financial responsibilities that you face now, and those you are likely to encounter in the years ahead. Then you need to educate yourself about investing. The more you know about selecting investments and building a portfolio, the easier managing your finances and reaching your financial goals will be.
| CAN
YOU AFFORD TO INVEST? |
SET GOALS
Investing usually involves creating a financial plan
and sticking to it. The plan can be a formal document or simply a list
of things you wish to do in the future. But it must include the financial
steps you’ll take to achieve them.
Some will be short-term goals, like buying a new car, making a down payment
on a home, or starting a new business. Others are mid-term goals, like
financing your children’s education, paying for extended travel,
or purchasing a second home. Finally, there are long-term goals —
most notably, planning for a comfortable retirement.
There’s no perfect time to invest, but the sooner you start, the more time your assets have the potential to grow. Not only can you add money to your investment accounts for a longer period, but you can afford to take more financial risks, with the corresponding potential for larger returns. And you can ride out the inevitable downturns in the investment markets, giving your portfolio time to regain any lost value. But remember, it’s never too late to start investing either.
While past results can’t guarantee what will happen in the future, stocks and the mutual funds that invest in stocks have provided stronger returns over the long term than cash or fixed-income investments. That’s been due to their potential to increase in value and to compounding, which occurs when investment earnings — in this case stock dividends — are reinvested to produce a new base on which future earnings can accumulate. However, in contrast to fixed income investments, equity investments generally are more volatile and carry greater risks.
If you’re putting money into an employer sponsored retirement plan, an IRA, or a tax-free educational savings plan, you’re already investing for the future in one of the most potentially productive ways you can. That contribution may be most, or even all, of what you feel you can put away. Yet the truth is, being able to afford the kind of long-term security you want will depend, in most cases, on the personal investments you make in addition to the money you put into these plans. If you don’t start until your financial goals are within sight, it’s tough to invest enough to produce the income you’ll need. It's also harder to weather the inevitable, cyclical downturns in the securities markets.
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