Eight Things to Think About Before Choosing an Investment: Given the recent events in the market, you may have been thinking whether you should make any changes to your investment portfolio. The Office of Investor Education and Advocacy at the SEC is worried that certain investors—particularly those who look for deals and fill mattresses—are acting rashly when making investments and failing to consider their long-term financial objectives. We are releasing this Investor Alert to provide you the information you need to make an informed decision, even if we are unable to offer you advice on how to manage your investment portfolio in a volatile market. Prior to making any judgments, take into account the following:
1. Draw a personal financial roadmap
If you have never made a financial plan before, take some time to sit down and assess your whole financial situation before making any investment choices.
Determining your objectives and risk tolerance is the first step towards successful investment. You may do this alone or with the help of a financial counselor. You cannot guarantee that the money you invest will turn a profit. But with the right information and a well-thought-out plan, you should be able to achieve financial stability and reap the benefits of wise money management in the long run.
2. Evaluate your comfort zone in taking on risk
There is risk associated with any investment. When purchasing assets like stocks, bonds, or mutual funds, it’s imperative that you be aware of the possibility of losing all or a portion of your money. Typically, securities are not federally guaranteed, in contrast to deposits at credit unions and banks covered by the NCUA and FDIC. It’s possible that you’ll lose your investment, or your principal. Even if you purchase your assets via a bank, this remains true.
Taking up risk is motivated by the potential for a larger financial return. If you are investing for the long term and have long-term financial objectives, you will probably make more money if you carefully consider higher-risk asset classes like stocks or bonds as opposed to sticking to lower-risk assets like cash equivalents. On the other hand, cash-only investments could be advantageous for short-term financial objectives. The biggest worry for those who invest in cash equivalents is inflation risk, or the possibility that over time inflation would surpass and reduce returns.
3. Consider an appropriate mix of investments
By including asset classes into a portfolio that have variable investment returns based on market conditions, an investor may help protect against catastrophic losses. The returns on the three main asset classes—stocks, bonds, and cash—have not increased simultaneously in the past. When some asset categories do well in the market, other asset categories usually perform badly. You may reduce your risk of losing money and even out the overall returns on your investments by spreading your investments over a variety of asset types. You will be able to make up for your losses in one asset group with larger returns in another if the investment return on one asset category decreases.
Additionally, asset allocation is crucial as it greatly affects your chances of achieving your financial objectives. Your investments could not provide a high enough return to meet your goals if you do not add enough risk to your portfolio. For example, most financial gurus feel that you should include at least some stock or stock mutual funds in your portfolio if you’re saving for a long-term objective like retirement or college.
4. Be careful if investing heavily in shares of employer’s stock or any individual stock
One of the most important ways to lower the risks associated with investing is to diversify your holdings. Obviously, you shouldn’t put all of your eggs in one basket. By choosing the right selection of assets within an asset class, you may be able to reduce your losses and the fluctuations in your investment returns without having to give up too much potential gain.
You run a serious danger of losing money on your investments if you make large purchases of shares of your employer’s stock or any other stock. You will almost surely lose a lot of money (and maybe your job) if the stock performs badly or the company files for bankruptcy.
5. Consider dollar cost averaging
One of the most important ways to lower the risks associated with investing is to increase your financial assets. Obviously, you shouldn’t put all of your eggs in one basket. By choosing the right selection of assets within an asset class, you may be able to reduce your losses and the fluctuations in your investment returns without having to give up too much potential gain.
You run a serious danger of losing money on your investments if you make large purchases of shares of your employer’s stock or any other stock. You will almost surely lose a lot of money (and maybe your job) if the stock performs badly or the company files for bankruptcy.
6. Consider rebalancing portfolio occasionally
Rebalancing entails restoring your portfolio to the initial ratio of its constituent assets. By rebalancing, you will ensure that your portfolio does not overemphasize any one or more asset groupings and that the amount of risk is appropriate.
Depending on the calendar or the success of your assets, you may need to rebalance your portfolio. Investors should rebalance their portfolios on a regular basis, such as every six or twelve months, according to several financial experts. One benefit of this method is that the calendar acts as a reminder for when you should think about rebalancing. Some recommend rebalancing only in cases when there is a greater than predefined percentage change in the relative weight of a certain asset type. This tactic has the advantage of protecting your assets.
7. Avoid circumstances that can lead to fraud
Like everyone else, scammers peruse the news. They usually take advantage of a widely reported news story to lure in investors and give the impression that their “opportunity” is more genuine. The SEC advises you to research investment opportunities and confirm responses with a third party before making any investments. Always take your time and speak with trustworthy friends and family members before making an investment.
8. Take advantage of “free money” from employer
Your employer may match all or part of your contributions in many employer-sponsored retirement plans. You are losing out on “free money” for your retirement savings if your workplace has a retirement plan and you don’t contribute enough to get the full match.
