As you start off in the world of investing, it becomes clear very quickly, that this is a very confusing place to be. There are so many different kinds of investments to choose from. How can you decide where to begin and what is right for you? Your initial step is to begin saving at least 5% of your income now and slowly raise this amount to 10% or higher. For example: if your current salary is $50,000 per year you should be saving $2,500 per year or $52.00 dollars per week. The best way to get started is to take advantage of your company sponsored retirement plan.
The next step is to understand how you feel about risk. Risk is defined as the possibility that the actual return on an investment will be different from the expected return. Along with risk is reward. The more investment risk an asset has, the greater the potential reward will be.
As you review the investment pyramid you will notice that the bottom tier is the lowest risk with the lowest rate or return. These investments are considered “safe” and consist of:
- U.S. Government securities like savings bonds, treasury bills and treasury notes and bonds.
- Federal Agency Securities, which are Ginnie Mae’s, Freddie Mac, and Fannie Mae. They are debt securities, which are bought and sold on the stock markets.
- Saving and checking accounts. These accounts are back by the FDIC (up to $100,000).
- Certificate of Deposits or CD’s. CD’s are a slightly longer term investment with somewhat higher interest earnings than a savings account.
Tier two consists of low risk and low return investments. These include, money market accounts, high quality corporate bonds or corporate bond mutual funds, and high quality municipal bonds or municipal bond mutual funds. These investments are somewhat safe but share the same inflation risk that the lowest tier investments do.
Tier three is relatively low risk investments such as convertible bonds or mutual funds, high quality preferred stock or stock mutual funds and balanced stock and bond mutual funds. These will give you a better rate of return and stability to your portfolio.
The fourth tier on our pyramid represents stocks and stock funds. These are a combination of large, mid and small capitalization stocks with a larger percent of the risk being in small and mid cap stocks. The “Blue Chip” stocks represent the companies that are the stable and have been around a long time. These companies tend to be more stable and somewhat less volatile when the market moves up and down. The stocks in this category have the highest percentages of risk and also the greatest rewards. There are also several mutual funds that fit in this category, which can give the investor the ability to invest in several companies just by owning one fund. They will also provide the investor with growth and increased risk.
The top of our pyramid represents the most risky of all investments-options and futures. These investments are for the savviest investor. Many fortunes can be made and lost in this category.
As you can see from our investment pyramid there are many different investment products to choose from. To determine which ones are the best for your situation you need to decide on your risk tolerance, do an accurate assessment of your current investments and decide how to allocate the funds you currently have into a portfolio that fits your investment situation. Your time frame for investing is also critical.
Contact us today to discuss your investments with a financial advisor who can assist you in determining the best plan for your investment horizon.