Deciding how to invest your hard-earned money requires careful thought and planning. In general, any investment you choose should help you to achieve your specific financial goals while meeting your level of comfort and risk tolerance. Assessing several key factors can help you determine if a particular type of investment is right for you.
Before you invest, you need to determine what you wish to accomplish by investing. You may be hoping to save enough money for retirement or to earn a specific dollar amount at the end of a certain time frame, for instance. The goals you establish can help you choose the best investment vehicles for reaching them.
Some types of investments require more hands-on management than others, so you'll need to honestly assess your level of investment expertise and how involved you want to become in the management process. If you're thinking of building a stock portfolio, for instance, but you know little about the stock market or don't want to be involved with the day-to-day vigilance stocks typically require, you may need to buy a mutual fund, hire a competent stock broker or avoid stocks altogether.
You'll need to consider whether to diversify your investments or limit them to just a few. Diversifying by spreading your money over a number of stocks, bonds and real estate is typically considered the safer strategy, as it helps protect you against losing everything if one or two of your investments go south. Investments such as mutual funds help you diversify easily, as they spread your investment dollars over a number of different funds, and they're directed by a professional fund manager.
Your age plays a key role in determining how to invest your money. Generally, the younger you are, the more risky your investments can be, as you have more time to withstand the ups and downs of more volatile investments such as stocks and mutual funds. As you get closer to retirement you may want to switch to more conservative investments to preserve your nest egg. A major loss right before retirement could possibly cause you to postpone your planned retirement date.
Some types of investments may come with tax consequences. If your stocks earn a profit, for example, you'll likely have to pay taxes on any gains in the year you earn them. On the other hand, if you invest in an IRA or 401(k), you may not have to pay taxes until you withdraw the money at retirement. You'll need to assess your own tax situation to see what types of investments make the most sense for you.
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