Saving and investing for your future is not one-size-fits-all. In fact, a good investment strategy includes a diverse set of investments, including stocks, bonds, mutual funds, and more. When the market changes, so does risk tolerance, and having a diverse set of investments can help soften the blow of those changes and protect you from major losses.
If you’re new to the investment world or trying to enhance your overall strategy for the future, it’s important to understand the different types of investments and their structure. Generally, investments are categorized as either conservative or aggressive, and a good investor will have a mix of each. Again, this helps you offset loss as the market ebbs and flows – as some assets increase, others will decrease, and so on.
But where should you start? What is the best investment option for your current financial situation? While you might need to sit down with a financial advisor to sort through the specifics of your financial snapshot and strategy, there are some long-term investment options you should familiarize yourself with first. Read below to learn more.
Stocks and the Stock Market
To understand stocks, you must first understand the stock market. The stock market is a virtual exchange where investors can buy or sell shares of publicly held companies, such as Nike, Apple, Amazon, etc. To exchange and purchase stocks in a secure and regulated environment, you must visit the Nasdaq or New York Stock Exchange. These exchange centers track the supply and demand of different company stocks and determine the price of each share.
When you purchase a stock, you are purchasing a small piece of the earnings and assets from that company. That means that if the stock value of the company increases, your shares increase and can be sold for a profit. It also means that if the company stock decreases, so do your shares, resulting in loss. While some stocks earn high returns, others come with a lot of risks, especially when market changes happen drastically depending on the news, current events, and other unforeseen circumstances.
Some companies, however, pay shareholders in dividends, which include regular distributions of the company’s earnings to its investors. To learn more, read the Slavic401k blog about stock market basics.
Bonds are fixed-investment loans you make to a company that pays you back with interest in regular installments. The installments are typically paid on a bi-annual schedule until the bond reaches maturity, at which point the total principal is paid off.
While bonds are generally less risky than stocks, there are still some risks to consider. NerdWallet notes that you may see a lower return on your investment with bonds compared to stocks, and like with any loan, the bond issuer may default on your loan, resulting in no return.
Purchasing individual stocks requires research, time, and money. If you’re looking for a more convenient approach to investing, then mutual funds may be the right option for you.
Mutual funds provide the opportunity to purchase a variety of investments within one transaction. Your funds are pooled together with other investors and managed by a professional who invests in stocks and bonds on your behalf.
As the investments in your mutual fund rise and fall, so will your earnings. When your fund is in a net positive range, you will have the option to sell it for a profit. NerdWallet notes that to invest in a mutual fund, you will need to pay an annual fee called an expense ratio to participate. If you’re not sure what kind of fee you’ll be subjected to, speak with a financial manager before investing.
Exchange-Traded Funds (ETFs)
Another popular type of pooled investment fund is an exchange-traded fund, or ETF. These funds can track specific assets or diverse collections of securities and can be traded and purchased on the stock market.
If you’re new to investing, utilizing an EFT can be a great way to create a diverse portfolio with little to no effort because they contain different types of investments such as stocks, bonds, and commodities, according to Investopedia.
Saving for retirement is not one-size-fits-all and there are many different approaches to securing a financially sound future. Whether you’re engaged in the stock market, managing real estate investments, or participating in a pooled fund like a mutual fund or ETF, trying a diverse set of strategies can make a big impact on your overall retirement accounts.
Staying informed on market conditions, meeting with a financial advisor, and tracking your profits and losses are great ways to maintain solid accounts, and can help you plan for life changes now and in the future.