- The first step is to identify what it is you hope to achieve with your investments and determine how much time you have to get there. For example, if you are investing for retirement, you will need to determine how much money you will need to live comfortably and how many years you have left to accumulate the money you will need.
- A basic principle for investing is: the higher the risk, the higher the reward. For example, over time, stocks offer a much higher return than bonds, but are generally considered riskier. Risk must be balanced with your investment time line. If you plan to retire in the next three years, then stocks may be a poor investment choice for you. Poor market conditions can cause stocks to lose money in the short run, so buying bonds, which hold their value, is likely a better choice for you in this situation.
- Many analysts recommend that investors who have a long period to grow their money use a method of investing called dollar cost averaging. This method recognizes that it is very difficult to find the perfect price at which to buy since the future is unknown. Instead of buying securities with one big lump sum, buy over a longer period of time in intervals to spread the cost basis of your investment. This technique has been proven to allow investors to buy more shares at cheaper prices.
- Investing all your money in one or two stocks or even just one asset class, such as bonds, will leave you vulnerable to the performance of those companies or that class of assets. Most analysts recommend spreading your wealth over a wide variety of companies and asset groups in order to reduce risk. Greater risk means greater reward only to a point. If a company you invest in goes bankrupt, you can lose everything.
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