You may be new to investing or intimidated by the process, so you may make moves with trepidation, or not invest at all. The truth is, there are simple ways to get started and stay invested.
The Proof is in Historical Performance
While it's true investing comes with risk, and past performance is no guarantee of future results, the historical performance of the stock market tells a positive story. According to FINRA, a not-for-profit organization authorized by Congress to protect America's investors, investing provided average annual returns of more than 10% for stocks, 6% for corporate bonds, 5.5% for Treasury bonds and 3.5% for cash or cash equivalents such as short-term Treasury Bonds.1
You Have Plenty of Investing Choices
When people think "investing," the first term that often comes to mind is "stocks." However, there are other ways to invest your money, each with different levels of risk and return opportunities. Common investment products include:
| Type of Investment | How it Works | How Your Investment Grows |
|---|---|---|
| Mutual Funds | Investing in mutual funds means your money is used to purchase a fund that contains stocks, bonds, and other investment products. | When the price of the fund changes, so does the value of your investment. |
| Commodities | Buying a commodity typically means you're investing in either agriculture, energy, livestock, or metal. | When the price of the commodity changes, so does the value of your investment. |
| Company or Government Bonds | Buying a bond is similar to loaning funds for a set period to a company or the government. | You receive your initial investment back in full at the end of the bond period; interest is paid at set intervals throughout the bond period. |
| Company Stocks | Buying a stock means you're buying partial ownership of a specific company. | Increased demand for a successful company's stock will drive up the price. |
Weigh the Risks vs. Rewards.
Regular savings accounts offer a low-risk way to earn interest on your money and federally insured financial institutions protect your principal deposit against loss. While they are very safe, they don't offer much opportunity to generate higher returns Given the returns on savings accounts have not kept pace with the rate of inflation over time, it can make sense to accept some risk with a portion of your money in some of the other investments mentioned above. You should also consider utilizing an asset allocation investment strategy for your money
Why asset allocation matters.
Different investments can behave differently under the same market conditions. An asset allocation investment strategy will first determine your individual investment profile, then diversify your money into a portfolio mix with investments that can include stocks, bonds and cash. For example, if you have a longer time horizon before you intend to use your money, say for retirement if you are younger; you'll likely want to be more aggressive, with more of your money invested in stocks, because you more time to recover from inevitable downturns in value. If you have a shorter time horizon, you'll want to be more conservative in your approach to preserve your savings. It is also very important to review your portfolio allocation at least annually to make sure it is still appropriate for your individual investment profile, which can change over time.
Lean on time in the market, not market timing.
When some investors get nervous, they think getting out of the market until things improve is a safe decision. Unfortunately, that's not the case because market timing involves two precise investing decisions: when exactly to get out of the market, and when to get back in.
By contributing a set amount of money to your portfolio each month, you can weather market volatility. Also known as dollar-cost- averaging, this strategy allows you to buy more investment shares when prices are lower and less when prices rise. In this way, you're building wealth over time and keeping your emotions in check. IRAs, 401ks and 403b accounts are excellent to use for dollar-cost-averaging.
You don't have to be a market wizard to invest wisely.
A lot of investing is just common sense. For instance, it's crucial to understand the advantages of time and diversification. The longer you keep your money in an investment, the more time your money has to benefit from compounding interest. And as mentioned earlier, staying in the market for the long haul also gives your account more opportunity to recover from inevitable downturns.
If you avoid putting all your financial eggs in one basket by diversifying your investments, you could minimize potential losses. Earlier we mentioned different investments can act differently under the same market, a diversified portfolio can have a specific investment temporarily losing value, offset by another investment that's gaining value.
Now is the best time to invest your money.
The sooner you invest, the more you can benefit from compounding interest. Waiting for "ideal market conditions" before opening an investment account could be a costly mistake since that day may never come. And the younger you start the better off you'll be. Even just $50 a month in an IRA can make a big difference over time because as your investment grows, you earn interest, and eventually interest on that interest aka compounding interest.
- Source: FINRA:The Reality of Investment Risk.