Saving is good for short-term goals (like when you save in a bank account for a new sofa.) For mid- and long-term goals (think college for the kids), you’ll likely need to invest your savings.
Saving is like a bicycle. It’s convenient and fairly safe if you stay in the bike lane close to home. But there are places that a bike just won’t get you.
Sure, you could ride your bike to South America (i.e. use a savings account for retirement). But it’ll take way too long and you’ll likely never get there. You need alternative forms of transport.
For longer-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.
Thinking about where you are in life will help determine your investing approach.
- How long do you have until you need the money?
- What’s going on in your life?
- How do you feel about risk? (Use this questionnaire (PDF) to find out.)
Then take those insights and apply it to some basic investing concepts.
Stocks, bonds, and other investments
What’s the difference between common types of investments? A lot of it centers around risk versus
In general, the higher the potential for return (a gain or loss on investment) the higher the potential for risk of loss—and vice versa. Check out the graphic below.
Mix it up.
Choosing a mix of investments from various asset classes also helps manage risk. That’s because
some kinds of 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 also a good idea to choose a mix of different funds within each asset class. Within your stock investments, you could choose some lower-risk stock funds and some higher-risk stock funds. This can help you balance the ups-and-downs of the market. This strategy is called diversification.** And over long periods, it might help you get a more consistent return.
Adjust over time.
As you get closer to retirement or another goal, you may want to adjust your mix of investments.
In general, it’s good to have less risk as you get closer to your “end goal.”
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 (PDF) your portfolio
regularly. 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 your money is taking on more risk
(or less) than you originally intended.
Rebalancing once a year takes everything back to your
original mix. Most financial institutions can help you do this easily. Some can do it
automatically for you.
Mutual funds or pooled investments can help make it easier.
We all hear about people “making it big” on individual stocks. But it’s also easy to lose money on individual stocks—or any single investment. It may be intimidating to think about researching and picking stocks or investments with the pressure of potentially losing your hard-earned money.
Mutual funds and other commingled vehicles include a variety of investment types. That helps to
Investment pros (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.
You’re already an “investor” if you contribute to your 401(k). But if you’re ready to venture beyond saving/investing in a retirement plan, the link below gives you three steps to get started.
to invest some of your savings?