- Investments can rise and fall, but they offer the potential for long-term growth.
- Funds make it easier to spread your money across many companies.
- Your mix of stocks, bonds and cash should match when you need the money.
- Small fee differences add up over decades.
What does it mean to invest?
Investing means putting money to work now so it can potentially grow over time. Unlike a savings account, stocks and bonds can go up or down in value, which means investing comes with risk. In exchange for that risk, they have historically offered the potential for greater long-term returns.
The main building blocks
Stocks represent ownership in a small piece of a company. They can grow in value and sometimes pay a dividend, but their prices can swing a lot in the short term. Bonds are loans to a government or company that are repaid with interest. They tend to move less than stocks but usually grow less over long periods. Cash and cash equivalents, like money market funds, tend to be stable in the short run but may not keep pace with inflation over the long run.
Funds help with diversification
Mutual funds and ETFs pool money from many investors to buy a basket of stocks, bonds or a combination of the two. One fund can hold hundreds of companies, which spreads out your risk. Index funds aim to track a market index, such as a broad stock market index, and often have lower costs than other funds.
Your risk tolerance and time horizon
Think about when you will need the money and how you would feel watching it drop during a downturn. Money you need in the next few years usually belongs in steadier places. Money you will not touch for many years can generally handle more ups and downs. How you split your money between stocks, bonds and cash is called your asset allocation, and it is one of the most important investing choices you make.
Pay attention to fees
Fees eat into your returns every year, and over many years small differences really add up. Look at a fund’s expense ratio, and ask about any account or advisory fees, so you know exactly what you are paying.
Investing habits to adopt
Investing a set amount each month helps you stick to your plan no matter what the market is doing, since you buy at both high and low prices. Rebalancing from time to time brings your mix back in line with your plan so you do not drift into more risk than you intended. And staying invested through rough patches has historically worked better than trying to time the market.
Missteps to avoid
- Chasing last year’s best performers
- Putting too much into a single stock
- Selling in a panic when prices drop
- Investing money you will need in the near future
Your next step
The right mix depends on your goals, your timeline and how comfortable you are with risk. If you would like help thinking it through, request a free consultation.
Want a second set of eyes on your investments?
We can talk through your goals and how your current mix lines up with them.