3 Things to Understand When Choosing Investment Options

3 Things to Understand When Choosing Investment Options

Investment Options

Each investor has different goals and circumstances. No set investing strategy works for everyone. However, better understanding the following three concepts may prepare you to find a suitable strategy.

1. Investment Types

Start by understanding the four most common investment options and comparing their risks as well as their potential for return. You’ll notice higher risk investment types have a higher potential for return — especially if you invest for the long term. Use this guide to get familiar with investment types you might want to include in your strategy.

Stocks

Overview

• Owning a stock signifies your ownership in a corporation
• You may invest in many different companies at once

Risk & Return

• Highest potential investment returns over time
• Highest risk of losing some or all of the amount invested

Other Information

• If the company does well and its stock price increases, your investment could increase in value
• If the stock goes down in price, your investment may lose money

Bonds

Overview

• As an investor, you loan your money to an entity
• The loan matures after a defined period of time

Risk & Return

• Typically moderate risk level
• Risk depends on the financial strength of the issuing entity

Other Information

• Used by companies, municipalities and governments
• Bonds finance a variety of projects and activities

Cash Equivalents

Overview

• Short-term investment securities
• High credit quality
• Easily converted back to cash

Risk & Return

• Low risk
• Low-return

Examples Include:

• U.S. government Treasury bills
• Bank certificates of deposit
• Other money market instruments

 Asset Allocation Funds

Overview

• The investment managers of an asset allocation fund invest in a mix of the three asset classes: stocks, bonds, cash equivalents
• Choose a fixed or variable portfolio

Risk & Return

• You select your preferred balance of risk/return

Other Information

• Some options start with high risk-return position and gradually become less risky as the investor ages
• Other options are actively managed in response to market conditions to maintain the original risk level objective
   

2. Investment Risk & Return

Investing always involves risk and there are no guarantees that an investment will grow in value. Some people are comfortable taking on the risk of frequent ups and downs of the market in return for potentially greater long-term returns. Others prefer slower-earning, less-volatile investments.

Investment options come with different levels of risk and return. Having a good mixture of options with different levels of risk and return can help to stabilize your portfolio during ups and down in the economy.

While you should keep an eye on your portfolio’s overall risk exposure, avoiding investment risks alone exposes another, less talked-about danger: the risk of inflation eroding your account balance.

Understanding your personal tolerance for risk will help you find a suitable investment mix for your portfolio. Maybe you are financially conservative and prefer stable investments. Or, perhaps you enjoy the thrill of risky investments and are hoping for larger potential pay-offs.

3. Your Time Horizon

Most investors have their eye on retirement. And, the amount of time you have until retirement may have a big impact on your investment strategy. This is called your “time horizon.”

If you have more time until retirement, you may feel comfortable with riskier investment choices. You will have time to potentially ride out a market downturn or otherwise recuperate from losses.

On the other hand, if your retirement is right around the corner, consider avoiding riskier options. Focus instead on preserving the assets you’ve already accumulated. It won’t be long before you will need them.

Use our Asset Allocation calculator to find an investment mix that may have a suitable level of risk and return for you.

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