
Don't let
terms like “liquidity” and “debt-equity ratio” keep you from
investing in your future. What’s most important is understanding a few key concepts
and knowing your goals.
Let’s face it — investing can be a little intimidating.
What do the different investments mean, which ones should you choose, and how can you be
sure they’ll help provide the money you’ll need to pursue your goals throughout
your life? As with anything else, understanding investing takes time. Yet the more
deliberately you approach the process, the less confusing and scary it’s likely to
seem. Thinking about investing in terms of a few basic concepts can help give you the
clarity and confidence you need.
What’s
the right mix for you?
Try the interactive Risk Assessment and Investment Guide to find out how much risk
you’re comfortable with, and get suggestions about the type of investment
mix that might be appropriate for you.
Try the guide
|
Why
you invest
First, think about the goals you’re trying to achieve. More than returns on a balance
sheet, these include some of your biggest life priorities, such as retirement, buying a
house, educating your children or paying for healthcare.
The investment decisions you make to help achieve those goals will be guided by two key
factors:
1) Your time horizon — Whether it’s college in five years or a
retirement three decades off, most goals come with a specific time frame before
you’ll need the money.
2) Your tolerance for risk — Generally, a longer time horizon enables
you to take on more investment risk in hopes of higher returns, because you have more time
to recover in the event of a market downturn. Another key factor is how much risk you are
personally willing to take.
How
you invest
Once you have a clear sense of your goals, the time you have to
reach them and the appropriate level of risk involved, what’s next? Now’s the
time to begin planning the best mixture of investments to help you get there — a process
known as asset allocation.
Asset allocation refers to the percentage of different asset
classes, such as stocks, bonds and various forms of cash, that make up your portfolio. Each
asset class carries its own unique characteristics and risks.
The scoop on
mutual funds
Mutual funds are a collection of stocks, bonds, cash equivalents and other assets that
are managed by financial professionals. They can offer convenience — you
don’t have to research all of those individual investments yourself — and
diversification.
A target date fund,1 also known as a
lifecycle fund, is another type of mutual fund that is designed to become more
conservative over time as your target date (the year in which you plan to retire)
approaches.
Review the FAQs for target date
funds.
|
Stocks, which represent ownership in a company, generally offer the highest
potential for return. But stocks and stock funds will fluctuate in value, are not
guaranteed and have historically been more volatile than the other asset classes.
That’s why they often carry the greatest risk.
Bonds are loans to a company or government that promises to pay you back,
usually with interest, over a period of time. They generally offer modest potential for
return and carry moderate risk.
Cash equivalents are short-term loans to a company or government. They are
readily convertible to cash, and their potential return is generally low, as is their risk.
In general, the longer your time horizon, the more time you have to take advantage of market
growth potential and ride out market fluctuations often associated with riskier investments
like stocks. As a goal such as retirement nears, you may want to gradually transition toward
less risky and less volatile investments. Still, there’s no one-size-fits-all answer,
and you may consider meeting with a financial professional to help determine how to balance
your mix in a way that aligns to your goals and situation.
Staying
diversified
Just as store owners stock their shelves with a wide variety of products to help ensure steady
income as the economy and their customers’ preferences change, investors should
include a variety of asset classes, regardless of their goals and risk tolerance. This is
another key investing concept, known as diversification.
By spreading your money across a variety of investments, you might be able to offset any
losses in one investment or type of investment with gains in another. While diversification
doesn’t ensure a profit or protect you against loss, it can help you manage investment
risk.
Keep in mind that diversification occurs not just across asset classes (stocks, bonds, cash)
but within each class. For example, when it comes to both growth and risk, a stock fund
representing large, stable companies may have significant differences from a stock fund
representing companies in emerging markets.
Keeping
your balance
Once you’ve thought carefully about your investments and selected a mix that you’re
comfortable with, don’t stop there. It’s a good idea to periodically take a
fresh look at how your investments are allocated — at least annually or as your personal
situation and financial goals change. Major life events like marriage, children, a career
change or retirement can trigger changes in your risk tolerance and time horizon, which in
turn will have an impact on your asset allocation.
Even if your personal situation doesn’t change, markets do. As they fluctuate over time,
some of your assets may gain in value or lose value, but not always to the same degree. That
can change the balance of asset classes within your portfolio.
Rebalancing can help you bring your portfolio back to the asset allocation you want. You can
sell part or all of an asset class that has become overrepresented in your portfolio, then
use that money to purchase investments in an underrepresented asset class. You can also
restore your portfolio’s balance by increasing deposits to your investment account in
order to make additional investments in an underrepresented asset class.
Approaching
the future with confidence
All investing involves some level of risk and nobody can predict
the future with certainty. Financial markets and the economy, just like your life and
family, are bound to change in ways you can’t foresee. Yet having a clear picture of
what you hope to achieve, a deliberate approach to investing and the flexibility to make
changes along the way can offer a sense of confidence that you’re on the right path.
Learn more and take action
- If your 401(k) account is with Merrill, review your plan’s investment
choices and review and reallocate your portfolio on Benefits OnLine®.
- Are you concerned about the ups and downs of the market? Watch this video, “Coping with market volatility.”