Simply put, investing is allocating resources, usually money, with the expectation of generating an income or profit either in the short- or long-term. You give your money to someone or something, hoping to not only get your initial investment back, but also more money in the future in the form of gains, interest or dividends.
There are several ways of investing: You can invest in endeavors such as using money to start a business or buying real estate in hopes of renting it out or flipping it for a profit. You can also invest in stocks, bonds and cash equivalents, which is where we are going to focus.
The roots of modern investing go back hundreds of years. Today, there are millions of investments traded on the world financial stage with some of the largest being right here in the United States and traded on the New York Stock Exchange and NASDAQ.
How It Works
Investing can come with both reward and risk.
For example, Yasmine buys 100 shares of ABC company at $10 each, for a total of $1,000. In five years, shares of ABC company are going for $15 each, and Yasmine sells those 100 shares for total of $1,500, netting a 50% profit of $500. That’s a good return on her investment.
However, companies can and often do lose money or can have events that causes their value to drop. For example, if Jayden buys 100 shares of XYZ company at $20 each for a total of $2,000, but the share price drops to $10 per share due to poor sales, he stands to lose $1,000 if the share price never rebounds to what he initially paid per share.
So, while investing can be a good method of preparing for the future, it does carry some risk. It may be wise to sit down with a financial professional who can help you determine your risk tolerance and assist you in sorting out investing decisions based on your unique situation.
For more information on Investing, watch this video which covers investing basics and factors to consider when investing for the future.
Key Considerations of Investing
Choosing how you invest is an important factor in creating a personal economy that works toward your financial goals, whether that’s paying for school, buying a house or even saving for retirement. Because each investor has different goals and comes from different circumstances, there’s no single strategy that works for everyone.
By having a better understanding of the basic principles of investing, you’ll be better equipped to determine which strategy is suitable for you.
Earlier, we mentioned “risk tolerance.” While all investments come with some sort of risk, which is the potential for an investment to lose value, everyone has their own comfort level with taking those risks. When thinking about investing, you need to know what your own tolerance for risk is. Ask yourself if you’re comfortable with the potential to lose money if there are changes in the economy, a company’s profits or an investment’s performance. You may also want to think about inflation, which is when the cost of goods rises and your purchasing power declines. With inflation risk, if your money doesn’t earn at least enough to stay ahead of inflation, you’re actually falling behind even while you’re earning money.
Another thing to keep in mind about risk is that your tolerance for it may change, especially as you get closer to the date that you want to cash your investment in or start taking withdrawals. As an example, imagine you’re investing money so you can put a down payment on a house 10 years from now. You may be willing to take a bigger risk today in the hopes of earning more money. But as you move closer to your target date, you may decide to move your money to a more conservative investment.
The same principle applies when you invest for retirement. You may have a higher risk tolerance early on in your career. As you approach retirement, you may have a lower tolerance for risk and choose to invest differently.
Working with a financial professional can help you determine what kind of risk you’re comfortable with, and what kind of investments are suitable for you.
Most investment options will fall into one of three broad groupings of investment types, called asset classes.
An asset class is a way of categorizing investment options by their key characteristics and how they behave in the market. Options with low risk might go in one bucket, while options with high risk might go in another. Understanding asset classes can be a good first step toward making an investment decision.
- Stocks offer the highest potential investment returns over time, but they also involve the most amount of risk to your principal investment.
- When you purchase a stock, it signifies that you have ownership in a corporation. You may invest in many different companies at varying levels, depending on your preference and comfort. It’s generally a good idea to research and understand the companies you’re investing in.
- Once you own the stock, if the company does well and its stock price increases, your investment could increase in value. But if the stock goes down in price, you may also lose money.
- Bonds are an investment type in which an investor loans money to an entity that borrows the funds for a defined period of time, maybe one, five or 10 years, etc.
- Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. For example, a city might sell a bond to build a parking garage.
- Bonds typically have a moderate risk level and are dependent on the financial strength of the issuer. Interest rates may also affect bond performance.
- Cash equivalents are investment cash securities that are short-term, have high credit quality and are highly liquid.
- Cash equivalents usually have a low-risk, low-return profile.
- Cash equivalents may include U.S. government Treasury bills, bank certificates of deposit, and other money market instruments.
Allocating Your Assets
A common strategy when it comes to investing is to diversify your money. Have you ever heard that old saying, “Don’t put all of your eggs in one basket”? It means that if you drop that basket, you risk breaking all of your eggs. The same philosophy applies to investing. Putting all of your money in one investment or one asset class can greatly increase your risk and potential for loss.
When deciding how to invest your money, it's important to find balance. You want stability, but you also want the potential to grow. You may be willing to take on some risk, but only up to a certain point. Understanding your risk tolerance, determining how long you have until you need to access your investment and diversifying your investments can help you meet these conflicting goals.
Not only is it important to allocate your money across each of the asset classes, it’s equally important to consider further diversifying WITHIN each of the asset classes based on your risk tolerance. For example, you can own stocks that are conservative and stocks that have greater volatility. The same is true with bonds. Cash equivalents, however, don’t carry much risk and are highly liquid, meaning that you can easily access that money.
There are even funds that are already diversified for you. These are called asset allocation funds, and they are an investment option that provide investors with a portfolio of a fixed or variable mix of the three main asset classes. For some investors, this is a handy way to diversify investments without having to pick and choose individual options.
Do you know why Wall Street uses the bull and bear symbol to indicate either an “up” or “down” market?
Bears tend to attack in a downward motion, pushing their prey DOWN to the ground. Bulls tend to charge their victims and lower their head just before using their horns to thrust their victims UP in the air. Thus, bear market indicates a “down” market where stocks are generally decreasing in value and a bull market means stocks are generally increasing in value.
Once you’ve decided what to invest in, you’ll still have to provide some ongoing maintenance. You can’t just set your investment strategy and forget about it.
Periodically review your risk tolerance, the amount of time until you need to access your investment and your investments themselves. Reviewing your strategy and making necessary adjustments key to ensuring your investments are still in line with your goals.
In times of market change or uncertainty, like we experienced in 2020 with the onset of COVID-19, it makes sense to revisit your investment strategy before making any snap decisions.
Riding out a market downturn is a little easier when you know you have a plan in place to stick to. Reallocating your long-term portfolio based on short-term market events such as interest rate movements and stock market uncertainties can be a real setback to your financial preparedness.
Be Smart and Invest Wisely
Investing can be a great way to prepare for the future. But you need to understand what opportunities are available and be aware of any risks. It’s important to find a qualified financial professional who focuses on investing and can provide you with the information to help you be a wiser investor.
USA Swimming and OneAmerica have come together to offer you access to a financial professional, at no cost to you. A financial professional can help you create a personal economy including assistance creating a budget that takes into consideration your lifestyle and may help you achieve your short-, mid-, and long-term financial goals.
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