As with any new endeavor, the first steps are the hardest. You might be avoiding investing because of all the numbers and jargon, as well as the fear that you’ll slip up and, you know, lose all your money.
But once you get started, you’ll find it’s not as scary (or risky) as it seems. Plus, the truth is that investing is the best way to grow your money and achieve your financial goals. Saving alone isn’t enough now—inflation will eat away at your hard-earned cash and leave you with less purchasing power than you started with. You need to invest to make sure your money keeps up.
But what about the risks?
Yes, investing does come with some risk. (Although, remember, so does not investing.) But some investments are safer than others, and you can adjust your portfolio to take on as much or as little risk as you can stomach.
How do I know how much risk I can stomach?
It depends on a number of factors, including what your goals are, how much time you have before you need the money you’ve invested, whether you have other savings you can count on and how you feel about the roller coaster ride that is the stock market.
OK, so which investments are safe, and which are risky?
On the safest side of the spectrum are Certificates of Deposit (CDs) and Money Market Accounts (MMAs). Both offer slightly higher yields than standard savings accounts—but still only as much as about 2.25% on average for five-year CDs (meaning you can’t touch your money for five years). Bonds are also considered relatively safe investments. They’re essentially loans you give to a company, government or other entity, so they have to be paid back by a certain date and with interest.
On the riskier side, you have individual stocks, which let you own a small piece of a public company—meaning your investment rises and falls based solely on the performance of that one company. If it has a killer year, so do you. But if it goes bankrupt, you lose, too.
With stock mutual funds and exchange-traded funds (ETFs), you can capture some of those potentially big gains while mitigating your risk. Funds can own hundreds of individual stocks at once, so big losses for one company in the portfolio can be offset by other companies’ gains.
Tell me more about diversification.
Glad you asked. Being well diversified is key to investing wisely. Basically, you want to spread your bets across a range of investments to increase your chances of finding a winner—or, at least, to minimize your losses if one company you invest in tanks. That means a mix of stocks, bonds and cash investments (like a money market account or short-term CD).
And don’t stop there: In the stock portion of your portfolio, you should own foreign and domestic stocks, as well as companies of different sizes and in different industries. You can also invest in a mix of...