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Money Lesson 4 - Basics of Investing |
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In general, risky investments generally pay more than safe ones. Investors demand a higher rate of return for taking greater risks. That's one reason that stocks, which are perceived as riskier than bonds, tend to return more. It also explains why long-term bonds pay more than short-term bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment's value. Planning and Setting Goals Investing is not that easy of putting your money in and waiting for the return. There's a lot of planning that goes into it. Before you putting your money on investment, you need to know what you are really looking for, plan it and set you goal on it. Answer below questions will help you in your investment goal setting.
Investment Returns Bonds and stocks are the two major asset classes that have been used by investors over the past century. Knowing the total returns on each of these, and their associated volatility, is crucial to deciding where you should put your money. Stock the highest risk among all the investment but it can yield over 10% per annual of ROI. The next best performing asset class is bonds. Long term U.S. Treasury notes or money market funds returned, on average, 5.0% per year. You need to aware that over the short term, stocks can be hazardous to your financial health. Determining Your Investment Style Before you start investing, you should determine your investment style. There are two major variables in figuring out your investment style - your risk tolerance and the amount of time you can dedicate to investing. Risk Investment does not guaranteed for profits; it may causes you lose your money as well. Each type of investment has it own risk and the level of risk is varied. The rule of thumb, high risk investment will give you higher in return but it will cause you lose the most money if it performance badly, and in low risk investment, you will gain lower ROI and lose lesser money. Risk of investment vary from government bonds, which are considered risk-free as they are guaranteed by the government, to commodities and options, which you can and often do lose all of your money. Hence, you need to understand your own risk profile; how comfortable will you be if you invest in something in which the price changes every day, sometimes not the way you want it to change? Time Speaking of the long term, time is another important element of your investing profile. How much time do you want to spend on investing? How active do you want to be in the management of your money? Do you want to spend 15 minutes a year on it? Or maybe you have eight hours a week, in which case you might enjoy researching companies and poring over financial statements to pick individual stocks. Another time factor is: When do you need the money? you need the money next week or next 10 years will dramatically affect what investment vehicle you decide to use. Although stocks have great long-term returns, the returns over periods of three years or less can be downright scary. You need to be able to make the appropriate choices when you are ready to invest. |
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