Understanding investment vehicles can be a tricky process, particularly if you do not have a strong background in finance. Too often people make emotional decisions when purchasing investments, or they simply make the decisions that their parents made. It is understandable that people get nervous when picking investments since they are potentially risking their hard earned assets. Here a few things to keep in mind when picking investments.
Many investment decisions are directly affected by your timetable. If you know you are planning on a major purchase in the near future (2-3 years), it is best to keep your money in conservative investments, such as money market accounts or certificates of deposit (CD’s). These are not necessarily exciting, but you don’t want to put yourself in a position where you are risking your resources by getting greedy. It is always tempting to try and time the market, but if you have a short timetable you may also lose a great deal.
Keep it simple
If your timetable is a bit longer (10+ years), you can get a bit more creative when it comes to investing. Many people suggest that it is good to diversify your portfolio, but don’t get overzealous in spreading your money too thin in too many places. If you are a bit uncomfortable with investing, a standard mutual fund that tracks with the stock market can be a fairly safe bet. Over time the stock market has always grown, but be reminded that this is “over time”. People get in trouble when they buy funds and then panic when they go down for a few months. Many investing firms also offer collections of funds that are designed for specific timetables, such as retirement accounts.
Buying stocks can be more exciting from an investment standpoint, but they also represent more risk and less diversity. If you want to get into individual stocks be aware of your timetable (mentioned above), and your freedom to lose money. You can easily find well-established companies that pay dividends and grow over time. However, this is not exciting enough for some people who are looking for the next “hot” stock. Keep in mind that professionals that track stocks for a living often have a hard time finding that hot stock. Research pays a major role in stock selection, and the best investor is the person who does not approach their transactions with overconfidence.
Regardless of whether you get into stocks or funds, it is always a good idea to keep some liquidity in your portfolio. In other words, keep some cash in a fund that you get at in case of an emergency. Many experts suggest having 3-6 months of expenses in an easily accessible fund. Granted, you can always sell stocks and funds, but this may subject you to taxes. Also keep in mind that there are plenty of available money markets that pay far better interest rates than your local bank savings account.
Overall, buying investment vehicles is aided the most by doing your homework. Reading prospectuses, websites, and talking to experts will help a great deal in making your decisions. As previously mentioned, investment decisions are very important so as not to avoid risking your precious assets. Don’t be afraid to make decisions, but always proceed with caution.