Are you a long-term investor? Short-term investor? Or, do you invest for income?
No matter why you invest, you need to be aware of your risk tolerance when choosing investments.
The chance of actualizing your financial goals is greatly increased when you choose suitable investments. DepCredit: xedos4 / FreeDigitalPhotos.netending on your objectives and time frame, some investment vehicles may be more appropriate than others.
To achieve long-term growth (i.e., funding your young children’s future education or your retirement), stocks or stock funds might be wise choices. Historically, stocks are the investment class that has increased in value. If your financial goal is far away, you have the time to weather any bumps or downturns the market might make, and still be able to reach your target. While the recent volatility in the market has scared away many investors, traditionally stocks were the investment vehicles with the highest returns. That being said, past performance is no guarantee of future returns.
In order to meet your short-term goals (i.e., going on vacation, preparing a wedding, or buying a large-ticket item), consider certificates of deposit in a bank (CDs) or money-market mutual funds. Often, these investments are considered suitable for people who will need their cash soon, as well as for those who require stability of principal.
If your goal is to earn investment income (to supplement other income), consider investing in bonds, preferred stocks, or bond mutual funds. Though interest rates may seem low these days compared to their historic norms, fixed-income investments are considered more predictable than shares, and can be especially appropriate investment vehicles for retirees.
To minimize taxes, consider investing in tax-advantaged investments. Work-related retirement accounts (such as an IRA) serve to encoura
ge investing by reducing or eliminating the tax bite out of your profits. Tax-deferred money can grow at a faster rate than would be possible if taxes were eating away at it. Though there are many conditions on these types of accounts, which you should review with a professional tax adviser, you will normally redeem these savings at retirement.
Having your funds allocated in the most suitable investment vehicles is not a guarantee that your fiscal goals will be met. But, boarding the proper vehicle is the first step towards reaching your destination. All roads may lead to Rome, but the journey is more pleasant by limousine than pedaling uphill on an old bicycle.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.