Investing tips: Part 1
Before making a serious investment decision, consider your goals.
For many, the thought of investing hard-earned money is overwhelming, and they have no idea where to start. Michigan State University Extension wants to help you identify the things to consider before making this serious decision: defining your goals, investment earnings and investment risks.
Before investing, identify your goals: why are you investing? What do you hope to achieve? Potential reasons for investing could include saving for a child’s college education, retirement, saving for a house or an emergency fund. Other questions to consider are when will you need the funds and in what format would you like to receive them; will you want periodic disbursements or a lump sum?
Before investing, ask the following questions regarding potential earnings: when can you get your money back, and will you get it all back? What type of return can you expect to make on your money, if any? In what form will your potential earnings come in: interest? Dividends? What is the growth potential over time? For example, if investing in limited partnerships be aware that they often restrict when you can cash them out. However, stocks, bonds and mutual fund shares can generally be sold at any time, but there is no guarantee that you will get back the full amount you paid for them. In addition, bonds typically promise a fixed return where other securities generally fluctuate with the market.
Before investing, know the amount of risk. Just because an investment did well in the past doesn’t guarantee that it will do so in the future. Keep in mind that every investment has some form of risk, and there is always the chance that you won’t get all of your money back or the earnings promised to you. Investments with higher potential returns have more risk associated with them. It is noted on USA.gov that the federal government insures bank savings accounts and U.S. Treasury securities (i.e. including savings bonds) but not all investment options are protected. One way to reduce risk is to diversify, or to put your money into a variety of investment options. This can help reduce risk since some investments do better than others, and some go up when others go down.
In the next article in this series, Investing tips: Part 2, the different types of investment vehicles and the risk associated with each will be discussed.
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