Investing involves using your money (or borrowed money that you control) to earn more money. Investments are classified based on the risk and return matrix. Most people base their investments on how soon they expect to retire, how long they want that money to last, and how they want to live after they retire. The average retired person that has money invested plans on really never touching the money invested but rather living off the interest their money is making them. For example if a person is retired and wants to live off $50,000 for the rest of their life, they might have 1 million dollars invested trying to earn 5% on the investments. That way at the end of the year they have made 50,000 which can be withdrawn and they still have that 1 million dollars invested.
Following are the possible categories :
High Risk = High Return
This formula is stating that a person that is willing to invest in riskier assets expects a higher return on those assets. A good example of high risk investments are:
Single stocks Small cap stocks Large cap stocks Volatile stocks
Low Risk = Low Return
This formula is showing that a person that want to have safe guaranteed investments show expect a low return. People that usually invest in safer options tend not to trust the market and have considerable doubts.
Examples of low risk options are: Mutual funds (diversified with stock and bonds) Treasury bills Triple A rated bonds
In general one should be able to put their investment in above two class. A person doesn’t want to put all of their money into investments. Most people want a safety net so they should keep a certain percent of their money in cash. The best thing an investor can do for retirement planning is to diversify their portfolio (don’t put all your eggs in one basket). Diversifying a portfolio makes is less risky to the investor and can still have a decent return.
Ratio in which one’s investment should be distributed between the two categories is based on the person’s risk appetite. One’s risk appetite can be a function of age and total assets. If a person is younger, he/she can invest more in riskier avenues since he/she can recover from the loss. If the person already has very high assets he can increase his/her exposure to the riskier investments to gain more returns. If a person is already retired, they might want to consider investing in safe investments that produce a low guaranteed income because they don’t have any other source of income coming in so they won’t want to take the chance on losing it.
Investing equally involves using your money (or borrowed money that you control) to earn more money.
Before proceeding, make sure that you understand the concepts of Personal Finance very well.
Top investment areas you can invest your Funds are:
Starting a business
Tax advantaged investing
Technical Analysis on trading and investing
Many excellent resources available on the web to guide you more are:
- American Association of Individual Investors is a comprehensive on-line guide to investing, developed to assist individuals in becoming effective managers of their own assets. Find how-to articles and interactive tools to expand your investing knowledge and apply it.
- Google Finance
- Yahoo! Finance Resources on stocks, mutual funds, other investments
- The Motley Fool Advice and philosophy on investing
- Morningstar Ratings on stocks and mutual funds
- New York Times Create a virtual portfolio that the Times will track for you
- Wikinvest.com A wiki – based investment site, edited by the community
- National Association of Investors Corporation Investment Clubs organization committed to teaching individuals how to become successful strategic long-term investors.