Thank you to Britany Enelow, Financial Advisor from the Credit Union of New Jersey, for discussing the basics of investing from which anyone can start planning for their future. While all investing carries some risk for the potential of some or all loss of money, being able to understand the different investment types, will help you to minimize your risks and work more effectively with a financial advisor.
So why should you invest? Investing allows you to grow your money to meet your financial goals, such as retirement or college. Money has purchasing power, both actual and potential. Investing allows you to potentially increase the potential purchasing power by growing a set amount of money into more money that hopefully surprises the rate of inflation, netting you more actual purchasing power in the future.
Before investing, it is important to determine what your financial goals are and what your risk tolerance is. All investing comes with some amount of risk so being able to determine how aggressive you want to be with your money will determine how you should invest it. Generally, as we get older, we become more conservative in our risk tolerance because it becomes more difficult to replace any lost money. This transition will affect your portfolio and the makeup of your investments. It is also important to diversify your investments to help mitigate any potential losses. By putting your money in a variety of investment types, you are better able to withstand market fluctuations and rebound quicker from downturns in the economy.
There are many different investments you can put your money into and each one will have a different level of risk as well as return. Generally, the greater the return, the higher the risk so it is important to understand the different investment types on how they can best serve your financial goals.
One of the most popular investment choices are stocks. When you buy stocks, you are buying into some ownership of that company. When the company does well, you do well, but the reverse is true. Stocks tend to have higher returns, thus more risk. However, over the long-term, stocks tend to provide a positive return on your investment. There are different types of stocks:
- Income stocks – these stocks pay dividends to their shareholders and tend to be in less volatile industries, such as energy, finance, and natural resources.
- Growth stocks – these stocks tend to invest all of their profits back into the business so you are relying on the success of the company to deliver a higher stock price which you can then sell to make money. These stocks tend to have a higher risk than income stocks.
- Value stocks – these stocks tend to be undervalued by the market even though the company’s performance may indicate otherwise. These are bought low and then sold when the market positively adjusts to the success of the company.
Another type of investment are bonds. Bonds are issued by a company or government entity to raise money for a project or activity. When you buy a bond, you are essentially becoming a creditor to the bond issuer and they promise to may you interest on your bond for the life of the loan. Generally, there is a minimum amount you must commit in order to purchase a bond. These are generally safer than stocks because the borrowing entity agrees to pay back the amount with interest, but also have lower rates of return. There are different types of bonds:
- Corporate bond – issued by private and public corporations and generally issued in blocks of $1,000. You are paid interest as the bond matures. If the company declares bankruptcy, bondholder claims may be given preference over other creditors.
- Municipal bond – issued by state, city, or other local governmental entity, but you do not receive any interest payments until the bond has matured. However, oftentimes the interest earned is exempt from federal, state, and local taxes.
- Treasury bond – issued by the U.S. Department of Treasury on behalf of the federal government. These are generally seen as risk-free, but often have the lowest yield of any bonds.
Mutual funds are a great way to diversify your money within a single investment. When you invest in a mutual fund, your money is pooled with other investors that is managed by a professional money manager who will charge of fee for managing that fund, generally 1%. Each mutual fund has a stated purpose and goal, which the money manager is required to follow. These funds can be spread out across one or more investment types, essentially trying to hedge as many bets as possible to maximize returns while mitigating risk. However, depending on the fees, they may lower or eliminate your rate of return and if other investors in the fund decide to sell and pull their money out, the entire fund will suffer, including yourself.
When investing, please remember DAD:
- D – Determine your financial goals and risk tolerance
- A – Allocate your money to best meet those goals and in your risk comfort zone
- D – Diversify your assets to help mitigate the risks inherent is all forms of investments
If you have any questions, please reach out to Britany Eneloy at 609-538-4061 ext. 2056 or email@example.com For a copy of the handout, please visit https://www.njstatelib.org/wp-content/uploads/2019/10/Investment-Basics.pdf.