Let’s face it; nobody ever became a millionaire just by saving money. If you want to increase your wealth to its full potential, you have got to invest it wisely over a period of time. Investing in stocks, mutual funds, and bonds is an advisable option, provided you know the basics of investing well or consult a financial adviser. Here are some handy tips to consider before you invest your hard-earned money in stocks, bonds, and mutual funds.
Historically, stocks are still the best out of all asset classes delivering around 10% average returns over longer periods. Ideally, you shouldn’t invest in stocks if you are looking for short-term gains.
Stocks are riskier; prices fluctuate based on everything from interest rates to investor sentiment to even weather, but what matters over the long-term are the earnings they deliver.
The key is to diversify your stocks portfolio by purchasing stocks of different companies in different industries to dilute the risks.
Over the short-term the performance of your stock is determined by market behavior. However, in the long run, it’s the performance of the company whose stock you buy that determines whether the share prices soar or plunge.
Individual stocks do not represent the stock market; a good stock may go up even when the market is going down; bad stocks will underperform regardless of the market trend.
In the long-run it is smarter to buy and hold good stocks than to engage in rapid-fire trading. That’s because short-term trades induce higher taxes and then there are also the costs of trading. Active trading would also require you to pay close attention to stock-price fluctuations.
Mutual funds can make it easy for you to diversify your portfolio; the risks are shared and costs are low, plus there is a greater flexibility in the types of funds you can invest in.
Mutual funds allow you to begin investing with a few thousand dollars, allowing you to attain a diversified portfolio for much less than you could by investing in stocks.
Mutual fund investments are not risk-free; to assess the risk level, check factors such as the fund’s biggest quarterly loss, which will help you prepare for the worst; its beta, which measures the fund’s volatility against the S&P 500; and its standard deviation, which shows how much the fund bounces around its average returns.
Don’t chase the winners; funds that outperform over one period do not always win in the long run. Look for consistent long-term performance when choosing a fund.
Bonds are simpler to understand and manage for the average investor; you loan money for a certain period of time to the issuer, and get it back with interest after the term ends.
Bonds are a relatively safer way to grow money, but although their term and interest payment are fixed, the returns can vary. Tax-exempt bonds usually yield less than taxable bonds but they can still be a better choice if the investor is in high-tax bracket.
Bond prices go in the opposite direction of interest rates; when interest rates fall, bond prices rise, and vice-versa.
Volatile interest rates affect investors if they are not looking to hold the bond to maturity.
Don’t forget to seek advice before you go investing; a qualified financial adviser can guide you in selecting the right stocks, bonds, and mutual funds to invest in based on your financial objectives and the amount of risk you are willing to take.