Part of our Build your own financial plan series
3 steps to get started when you're ready to invest
A savings account is good for your short-term goals—the money you’ll need in the next three years. (Visit bankrate.com to compare banks with the best savings rates.)
For mid- and long-term goals, you’re going to need something with an engine. That’s what investing does—takes your saving strategy and puts an engine behind it.
- For money you need in three to five years, you have more time to weather market volatility, but you’re still likely sticking to more conservative, fixed income investments like bonds.
- For savings you won’t need for five or more years, you may consider other investments to help spread risk and grow your money, like mutual funds, stocks, exchange traded funds (ETFs), and annuities—depending on your risk tolerance.
You’re already an “investor” if you contribute to your 401(k). But when you’re ready to venture beyond saving/investing in a retirement plan, here are three steps to get started.
Tip: How will you know you’re ready to invest? Read about the four signs to find out.
1. Know your investment risk tolerance.
What’s the difference between investment types and asset classes? A lot centers around risk vs. return.
In general, the higher the potential for return (meaning a gain or loss on investment) the higher the potential for risk of loss—and vice versa.
Risk tolerance is how much you can keep the emotion out of investing. Healthy markets typically go up and down, but those short-term market changes can stir both excitement and regret.
Some people are more comfortable knowing they could lose money in the short run if there are possible gains in the long run. Others are more conservative, preferring less risk.
To learn about coping with market volatility, watch our video.
2. Mix it up. (Diversify.)
Choosing a mix of investments from various asset classes helps manage risk. That’s because some investments tend to increase in value while others decrease.
For instance, stocks and bonds tend to move in opposite directions. If the value of your stock funds goes down, the value of your bond funds may increase.
It’s good to choose a mix of different investment options within each asset class. So within your stock investments, you could choose some lower-risk and some higher-risk. This can help you balance stock market volatility.
This is diversification. Over long periods, it might help you get a more consistent return. Diversifying means allocating your dollars across U.S. and international stock and bond markets, blending different investments in a single portfolio.
To learn more, read Cook up your asset allocation plan to explore ideas.
3. Adjust your investment mix over time.
A few words about mutual funds or pooled investment options.
We all hear about people “making it big” on individual stocks. But it’s also easy to lose money on any single investment. It may be intimidating to think about researching and picking stocks or investments with the pressure of potentially losing money.
Mutual funds and other commingled investments (where investors’ contributions are “mutually” pooled) include a variety of investment types. That helps reduce risk.
Investment professionals (portfolio managers) with special training and tools manage mutual funds. That means you don’t have to worry about the everyday decisions involved in picking individual investments within a mutual fund. And in some types of funds, the managers even adjust the mix of investments over time to help you stay on track to reach your goals.
In general, it’s good to have less risk as you get closer to your “end goal,” whether that’s retirement or another date.
That’s because if the market drops, you have less time to recover from losses. Giving up some potential for growth might be worth it in exchange for lower risk.
It’s also a good idea to rebalance your portfolio at least annually. Over time, some investments may grow more than others. After a while, your mix of investments isn’t the same as when you started. That could mean you’re taking on more risk (or less) than you originally intended.
Rebalancing takes everything back to your original mix, but if the change is more in-line with where you want to be, that’s OK, too. Most financial institutions can help you with rebalancing. Some do it automatically for you.
- Got a financial professional? They can help you learn more about a personalized asset allocation plan. If you don't have a financial professional, find one near you.
- Talk to your tax advisor to understand taxes on investments (dividends, capital gains, ordinary income) so you’re prepared to file with the IRS.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. Lower-rated securities are subject to additional credit and default risks. Small and mid-cap stocks may have additional risks including greater price volatility. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. The risks associated with investing in emerging market debt include currency fluctuations, economic instability and adverse political developments. Emerging markets debt may be less liquid and markets may lack established legal, political, business and social framework to support securities markets.
Real Estate investment options are subject to investment and liquidity risk and other risks inherent in real estate such as those associated with general and local economic conditions. Property values can decline due to environmental and other reasons. In addition, fluctuation in interest rates can negatively impact the performance of real estate investment options.
* An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Investment options noted other than certificate of deposits are not FDIC insured; may lose value; are not bank guaranteed.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.