If you already have an emergency fund, a solid spending plan and still have a little extra cash to spare each month, consider investing what you’ve got left. Here are four things a beginner should know before getting started.
What is investing?
Investing is simply taking some of the money you have left after meeting your financial responsibilities and putting it some place where it will make more money over time. Depending on the goal you set for the initial amount set aside to invest, the time you keep the money invested could be short or long.
What should I invest in?
Stocks, bonds and cash are the most common types of investments. These are also sometimes called asset classes:
- Stocks are shares of ownership in a company. These shares represent a claim on the company's assets and earnings. Whether you say you own shares, equity or stock, in a company it all means the same thing — you’ve made an investment in the company.
- Bonds are a debt investment. An investor, like you, loans money to an entity (such as a local government) to borrow funds for a defined period of time at a variable or fixed interest rate. Owners of bonds are debtholders, or creditors, of the issuer.
- Cash is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments.
In general, stocks tend to fluctuate more than bonds, but grow more over the long term. Bonds tend to be more of a stable investment with guaranteed income. Cash is the safest, but lowest performing asset.
Pick the right mix of investments
Asset allocation is one of the most important decisions you’ll make for your portfolio. It’s all about balancing risk and reward by picking the right combination of stocks, bonds and cash to meet your investment goals. The asset allocations you select to put your money in are called your portfolio, when looked at all together.
Each asset class tends to perform differently under the same economic conditions. While one asset category may increase in value, another asset category may decrease or not increase as much. If your portfolio is spread out among different asset classes based on your risk tolerance, there could be ups and downs. When this happens, the downs should not exceed what you are comfortable losing.
Get started with a professional
Becoming an investor could be a way to help you meet your long-term financial goals. There is no single formula that can find the right asset allocation for every individual. That’s where a financial professional can help. Talk to an expert who can walk you through different options to ensure your decisions make sense for your financial goals.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.