Investing can be a little intimidating for people who are new to it. But it’s a means to getting things you want. There may be aspects that are unsettling. But, like rides at an amusement park, the scary part is always temporary. And the end result is so worth it! That should be comforting to first-time investors.
There’s so Much to do – Make a List
Remember when you were a kid and you ran through the entrance to the amusement park? There was no plan, you just figured that running would assure that you’d experience everything in one visit.
This is a good starting point for considering your investments. Before you run off and start throwing a bunch of money at the latest hot performing mutual fund or meme ETF, you really need a plan.
Your plan can be simple, like: you want to save for retirement or you want to pay for your children’s college educations. You just need enough detail to match the timing of your goals to the investment horizons of the securities used to finance them.
The Ball Toss Game and Investment Horizon
Investment horizon is the time it takes an investment to reach its full potential. Generally, you’ll want that to happen at about the time you expect you’ll need the money. Think about investment horizon like the ball toss game at the amusement park.
The cups are laid out so that some of them are closer to you than others. Think of the cups as buckets to hold investments you’ll use to accomplish your various financial goals.
Some goals will happen pretty soon. This bucket may hold short-term investments. Mid-term goals are in another bucket that may hold intermediate-term investments. Long-term goals are in the bucket farthest away. Long-term investments may work just fine here.
Bumper Cars, Roller Coasters and Risk Tolerance
The bumper car ride is a lot less dangerous than the roller coaster. If you’re afraid of risk, ride the bumper cars. If risk doesn’t bother you, hop on the roller coaster.
Risk is also part of investing. Coincidentally, risk is closely related to investment horizon. The longer an investment takes to reach its full potential, the riskier it’s likely to be. Risk is also closely related to expected return. The riskier an investment is, the higher the return it’s likely to deliver over time.
So, financing long-term goals with risky assets is probably appropriate. Intermediate goals might be financed with a mix of risky and not-so-risky assets. And short-term goals – especially really important ones – might only be financed with things that don’t have a lot of investment risk.
Mix Things up – Asset Allocation and Diversification
Now, some people want the thrill of the roller coaster with the relative safety of the bumper car. Enter the tilt-a-whirl, a relatively tame combination of spinning and gyration that never leaves the ground.
Like the tilt-a-whirl, an investment portfolio can be configured to reduce risk without eliminating performance. There are a couple ways to do this.
The first is to combine risky and less-risky assets, like stocks and bonds. Blending can create portfolios with risk and return parameters tailored to your unique requirements. This is called “asset allocation.”
The other way to reduce investment risk takes each asset class in the portfolio and spreads the dollars among the securities (e.g., stocks and bonds) of many different companies or bond issuers. This is called “diversification.”
Time Flies When You’re Having fun…and Investing
When you’re a kid, there’s never enough time at the amusement park. But time goes by just as fast for first-time investors too. That’s why starting the process now is so important.
And we can help. We’re available 7:30am to 8:00pm (CT) Monday-Friday.
Call us at (800) 235-8396.