Basic Investment Concepts
Whether you make or lose money in the market depends on how your investments perform. That's what the risk in investing is all about. You can lose money because of the "downs" in the market, but you can also make money on the "ups."
Knowing how different products perform and the risks they represent can greatly increase your chances of choosing good investments. This means you need to take time to understand the various investment products. You need to understand their goals and risks.
Never invest in something you don't understand. Ask yourself "What is my objective?"
- Is it conservative, with safety of principal most important?
- Is it income-oriented, in which regular payments from the investment will be used for living expenses?
- Are you investing for long-term growth, which may carry more risk than either income or safety?
- Are you comfortable with a higher risk in hopes of higher gain, or is some mix of these objectives right for you?
The following investment objectives, or some combination of them, can provide an answer.
- Safety is a conservative investment goal that carries minimal risk of loss of principal.
- Income reflects an investment goal that provides income through regular payments to the investor.
- Growth investments are for long-term investing. Growth investments usually carry a higher risk than either safety or income investments.
- Speculation is the riskiest investment. With the high risk usually comes the possibility of higher gains.
If you want your investments to compound more quickly, you don't have to take more risks. What you can do is put money into tax-deferred investments, including individual retirement accounts (IRAs) and salary reduction retirement plans like 401(k)s or Keoghs.
In most cases, there's cap, or limit, on the amount you can invest tax-deferred each year. Experts advise you to take the fullest advantage you can of this opportunity.
There are drawbacks to tax-deferred investing. Generally you'll have to pay a penalty as well as whatever tax is due -- if you withdraw money from tax-deferred accounts before you reach 59 %2. And you usually must take mandatory withdrawals and pay the tax that's due beginning at 70 %2.
If you're worried about having enough money when you retire, tax-deferred investing may be the best way to meet your goals. And there are situations when the withdrawal penalty is waived, including serious illness, paying college tuition or putting money down on a first-home purchase.
Always set aside some of your money for emergencies before you invest.
Ask for advice from a trained and licensed professional.
- Be selective in your investment choices. Exercise your right to say "No."
- Ask about all fees and charges related to your investment choices prior to purchase. Fees reduce your rate of return; it may take a year or more to recover such fees.
- Develop a sensible investment plan and follow it.
- Judge each company on its own merits. Do not invest in a company just because it is part of a fast growing and successful industry.
Never invest based on information obtained from an unsolicited telephone call or based on a "hot tip".
Check the credentials of anyone you do not know who offers to sell you an investment.
After you develop a sensible investment plan, stick with it.
Reiterate Investment Basics
- With the exception of bank insured products, there will always be a degree of risk involved in investing.
- Risk and return go hand-in-hand. Higher returns usually mean greater risk. Lower returns generally promise greater safety.
- Never invest in anything that you don't understand