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History has proven that one of the most effective
ways to grow your money is to invest it. So while you're
on a quest to plan for your retirement, learn more about
the basics of investing. It's information you can use to
make informed financial decisions along the way.
There are many options available to you when it comes
to investing for retirement. How and what you invest
in
depends on a number of factors like how much time
you have to grow your money and how comfortable you are
with risk.
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are three basic investment
opportunities: |
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Stocks: When you own stock in a
company you have ownership in that company.
Investing in stocks gives you the biggest
potential gain - and it's the most
risky. |
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Bonds: A bond is basically a loan to
a company or the government. Historically, most
bonds are considered less risky and offer steady
income. |
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Cash Equivalents: This refers to
money market funds, certificates of deposit and
other instruments that provide the greatest
protection, but very little opportunity for
growth. | |
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Why take a risk with
your money? Because theoretically the greater the risk,
the greater the potential reward. By investing
carefully, you can earn significantly more money than by
keeping all of your retirement money in a savings
account, for example. Most financial experts agree that
you should put away at least a portion of your
retirement money in higher risk, with potentially higher
returning, investments. These higher risk investments
can help you stay ahead of inflation - which can eat
away at your nest egg over time.
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If you've ever invested, you
know that an investment can be up one day and
down the next. Spreading your money out over
different types of investments helps keep one
single investment from having to carry the
load. |
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One way to reduce investment risk is to diversify -
or spread your risk out in different places. Instead of
investing all your money in one stock, consider
investing it in many stocks. Instead of investing your
money in only stocks - diversify your investments among
other instruments, like bonds and CDs.
How you diversify - how much you decide to put in
each type of investment - is called asset allocation.
Depending upon your age and personal situation, you may
want to consider selecting portfolios with a
concentration of stocks, bonds or a combination
of
stocks and bonds.
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 When you establish your
retirement strategy early in life, you give
yourself a long time to invest. Because time is
your ally, you can benefit by having a high
percentage of growth portfolios in your investment
mix.
You don't need a chunk of money to invest. You
can use a strategy for investing - Dollar Cost
Averaging - designed to create an opportunity to
"buy low and sell high."
Suppose you invest $100 in a mutual fund every
month. During months when the price of a share is
lower, such as March or April, in this example,
you'll be able to buy more shares for your $100.
In the months when the price is higher, as in
January and June in this example, your $100 buys
fewer shares. (This example is hypothetical and is
not intended to represent any particular
investment.) |
When you invest consistently over time, you're dollar
cost averaging - whether you know it or not. This
strategy works best for the investor who can keep
investing even in down markets. Just know, it does not
guarantee a profit, or assure against a loss.
How long can it take to double your
money?
 Nobody can say for sure how a
particular investment will perform. Even past
performance is no guarantee that your investment will
perform well in the future. But if you were to assume
that a particular investment could return a certain
percentage over time, the basic Rule of 72 can help you
figure out approximately how long it will take to double
your money. Simply divide the approximate expected
return into 72. For example, if you expect to earn 8% on
a particular investment, it will take you 9 years to
double the value of your investment (72/8=9). The impact
of taxes isn't considered in this hypothetical
example.
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