Investing involves setting goals for the future and weighing the risks and potential rewards associated with a wide variety of investment opportunities. If you are a new investor, this might seem like an overwhelming task.
But take heart. Becoming familiar with a few basic concepts could help you have more confidence in your investing decisions. So don’t be intimidated by complicated-sounding jargon, and don’t hesitate to ask questions — after all, this is your money.
Understand your investment options
There is a direct relationship between investment risk and return. Higher-risk investments (such as stocks) will generally offer the potential for higher returns in exchange for taking greater risk. The lowest-risk investments, such as U.S. Treasury bills (which are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest), typically offer the lowest returns.
A stock is a security that represents ownership (or equity) in a corporation. An investor who purchases shares of stock owns a piece of the company and has a claim on a portion of the assets and earnings. This means shareholders can make money if the company does well or lose money if the company does poorly.
A bond is a fixed-income security issued by a government entity or corporation to raise money needed for ongoing operations or to finance new projects. Investors who buy bonds are essentially lending money to the issuing organizations in exchange for regular interest payments.
Mutual funds and exchange-traded funds (ETFs) are investment vehicles that pool money from investors to purchase stocks, bonds, cash, and other securities according to fund objectives. Mutual funds and ETFs invest in dozens to perhaps hundreds of securities, offering shareholders a level of diversification that might be difficult for individual investors to achieve on their own.
Employ time-tested tools
Asset allocation and diversification are widely used investment techniques that can help manage risk and improve the performance of your portfolio over the long term.
Asset allocation is the way your investment dollars are divided among major asset classes such as stocks, bonds, and cash alternatives. The goal is to select an appropriate balance of assets that seeks the highest potential return in light of your investment objectives, risk tolerance, and time horizon.
Diversification involves spreading money among multiple investments whose values typically rise and fall at different rates and times. This way, gains in one area can help compensate for losses in another, and may help limit the impact of loss from any single type of investment.
Revisit your portfolio
The asset allocation of your portfolio may shift over time due to market performance. A shift toward stocks may leave you overexposed to risk, or a shift toward bonds might make your portfolio too conservative to accomplish your long-term goals. Rebalancing is a process that returns a portfolio to its original risk profile.
One rebalancing method is to sell some of the assets in which you have too much money and use the proceeds to buy more shares in the other asset classes. However, this could trigger capital gains taxes in a taxable investment account (but not in a tax-deferred retirement account such as an IRA or employer-sponsored retirement plan). Another way is to direct new investment dollars into the underweighted asset class. While this method typically takes longer, it generally has no immediate tax consequences because you’re not selling any assets.
Expect market volatility
The potential for larger, short-term price swings is the price you pay for the higher long-term returns associated with riskier investments. But even if you view market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake.
Although only you can decide how much investment risk you can handle, try not to overreact when the market drops, especially if you still have many years left to invest. Instead, stay focused on your financial goals and your long-term investment strategy.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.
Mutual funds and exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
