Investing can be a financial lesson in patience and opportunity
The best retirement investments and advice is not one-size-fits-all. The Stock Market offers every American the opportunity to make money. Through thousands of investment opportunities on any given day we can increase our wealth or lose our shirts. Trying to decide when, how and what to invest in seems to be a major decision for most middle class families. The answer really depends upon your individual risk tolerance and investment goals.
Your Risk Tolerance
Before you can begin to invest in anything, it is helpful to know your risk tolerance. Your risk tolerance according to “Investopedia” is the degree of uncertainty you as an investor are willing to take on as it relates to negative changes in the value of your investments. Basically this means how much loss you are going to be able to handle comfortably. A young man around the age of 25, may have a very high risk tolerance because he understand the ebbs and flow of the stock market and has time on his side for his investments to recover. A man of 75, on the other hand, would probably have a lower risk tolerance he couldn’t handle major losses well.Credit: photo credit: unaesthetic via photo pin cc
Depending on your risk tolerance, you will make decisions on how to invest. Younger people tend to go for stocks, mutual funds, and ETF’s that are more aggressive. Middle age people look for something right in between which is usually a good mix of stocks, bonds, and mutual funds. The older a person gets, they tend to be far more conservative; often taking their money out of the stock market and placing it in money market accounts, certificate of deposit accounts, and annuities. This will help safeguard them from most losses.
What About 401k’s
If your job offers the opportunity for you to invest in a 401k with a matching contribution; what are you waiting for? This match is free money. For example, if you invest 5% of your income per year and your company offers a match up to 5 %, then you would actually be investing 10% without any additional funds coming from you. If nothing else, everyone should at least invest enough money to get the match, if not; you are leaving money on the table. But what if there is no match? Even if the company does not offer a matching contribution, if you aren’t saving anywhere else and there is no defined pension plan on your job; then a 401k investment is a good option. You will have automatic deductions from your pay which means that without any additional actions on your part you will continue to invest. You will also have some tax benefits as this money takes away from your taxable income and is tax deferred growth because you haven’t paid taxes on this money yet. 401k’s should be a part of your investment strategy.
Other Investments-Individual Stocks, Mutual Funds and Penny Stocks
Credit: photo credit: Walter Rodriguez via photo pin ccWhen thinking about investing in individual stocks, tread lightly. Many fortunes can be made or lost this way. The rule of thumb when investing this way is never put all of your eggs in one basket. For diversity, look into mutual funds. These investments pool together your funds with that of thousands of other investors and invests your money in a diversified portfolio of stocks, bonds, equities, etc. This helps the little guy trying to invest by providing a fund manager (for a fee) to decide what investments will give you the desired returns. By being diversified your risks are spread over several sectors for instance you may have stocks in retail, technology, manufacturing, and health. This lessens the chances of you losing all your money if one of your investments starts to perform poorly.
For those that like to take big risks, penny stocks are an interesting lot. These are stocks that sell for less than $5 per share. These companies are usually those that are considered speculative meaning there have serious risks for big losses if you gamble on this type of investment. On the other side, some of the highest returns can be garnered by those that can stomach the uncertainty. Example, when Sirius and XM radio merged; there was a point where SIRI looked as if it would go into bankruptcy. During that time the stock traded for .05 per share. Fast forward to 2012 and even today with the market being down the stock is trading at 2.56. Do the math, if you had invested $1000 when the shares were .05 what would you have today? Try $51,200 in a little over 3 years; now that’s one heck of a return on your investment. Now this example is by no means the norm. Many investors in penny stocks have lost everything when the company became insolvent. This is not for the faint of heart. So as tempting as it may sound, proceed with caution.
Investing can be a financial lesson in patience and opportunity. In order to do well in investing you need to learn as much as possible about participating in the stock market and the companies you are interested in investing in. If you don’t have the time to do this; look to mutual funds and 401k’s where the work is done for you. You still need to educate yourself enough to understand your investments, but the managers in these cases will do the rest. If you like adventure, take a little of your fun money and play with the penny stock. You may come away, like the early investors in SIRI, with a small fortune. Regardless, of how you chose to invest, just start. Your future is on the line; plan for it.