If you’re wondering which investments are right for you, here’s how to tell.
The asset classes you invest in can make or break your financial stability during retirement. A diversified portfolio minimizes your overall risk, but knowing which investments fit you is the most crucial factor for safe, smart investments.
While millions of people choose to work with investment, tax, trust and other wealth management advisers, many go it alone. Either way, it’s essential for you to understand the fundamentals of investing including various asset classes, types of investments and most important, how you can manage your investments and meet your goals without losing your mind or wallet.
If you don’t have an investment consultant to walk you through your options, try these two ways to make a successful investment plan on your own.
Ask the Right Questions
For the purposeful people taking our retirement course, you already know that asking questions is the key to acquiring new knowledge about anything. You don’t know what you don’t know. But you do know what you want and you have an idea of what has worked in the past, and what may work well in the future so you can live, work and retire on purpose.
There are certain, “intelligent” questions you can ask to find out which investments are right for you. Everyone’s situation is unique. Asking yourself more intelligent questions, keeping detailed notes and organizing your new knowledge for quick reference will only empower you to choose better advisers, make better investment, financial and other lifestyle choices.
You can more easily narrow down which investments are wise, based on your goals, time horizon, and finances. Interest rates, changing markets and other variables present constant, potential risks you must be prepared to meet. What you should invest in comes down to how much you want to spend, what you’re willing to risk, and your goals.
Answer these questions to get a better idea about the type of investments you should make:
- How long do you have to invest? Your time horizon will help you decide. A long-term investment, for example, can withstand small losses and market fluctuations. Therefore, you can have a more aggressive strategy than with short-term investments.
- What is your risk tolerance? Your risk tolerance is how much you can comfortably accommodate fluctuations in the value of your investments. Consider the risk that your investment will not give you the returns you want, and the risk that inflation will decrease its value. Take a risk tolerance quiz to determine your degree of tolerance. There are several free quizzes available online.
- What does your financial situation look like? No two people have the same financial needs or goals. Decide whether you’re a conservative or aggressive investor. A conservative investor typically has a shorter time horizon, lower risk tolerance, and is more financially unstable than an aggressive investor. A conservative investor may want to rely on bonds (a short-term investment) rather than stocks.
These three questions will provide a solid foundation for deciding which investments are right for you. Journal, search your heart and seek wise counsel so you can sleep well at night knowing you’ve made great decisions. There’s not much worse than losing sleep at night over money.
The right investment mix will align with your approach as an investor. You may have a conservative mix, a relatively balanced mix, a mix with room for growth, or an aggressive growth mix. To find the exact mix for you, first understand the different investment types. When it comes to money, and the emotions of money, it’s wise to “know thyself.”
How To Know If Investments Are Right for You
To make savvy investment decisions, be armed with knowledge about basic concepts. Stocks represent an ownership in a company, with a value that will rise and fall depending on the success of the business. Stocks have the potential for high returns, but they also have high risk.
Cash investments include savings accounts and certificates of deposit. These investments have the lowest risk, but also the lowest returns. Many people will tell you cash is dangerous because of inflation risk. Yes, historically, this is true. But, in recent decades we’ve lived through global deflation, not inflation. But when it comes to the real world, inflation is personal because it’s based on your personal economics and choices.
Many investors seek safety in bond investments. Bonds are loans you give to an enterprise or organization in exchange for repayment with interest. Bonds have a medium level of risk and returns. Investors can own bonds individually, in open-end or closed-end mutual, funds and ETF’s. An investor must always be aware of other asset classes and alternative investments such as real estate, antiques, art, commodities, options, and many other investments. There is no such thing as one size fits all.
A strong, safe portfolio will have more than one type of investment for diversification purposes. Once you understand your personal goals as an investor and the types of investments available to you, you can invest with confidence.
Got a question about which investments are right for you? Leave a question or comment here or ask your investment adviser.