Introduction to Investing, Investment Basics
New to investing? No worries, learn about some of the investment basics. When you begin investing you’ll have many options to think about, like stocks, bonds, mutual funds, index funds, and ETFs. Before you start investing, here are a few basic guidelines to keep in mind.
1. Stocks have Outperformed other Investment Vehicles over the Long-term
Looking back, historically stocks have outperformed other investments providing higher returns. The next in line to stocks have been bonds.
2. Stocks not so Good in the Short-term
If you don’t plan on keeping an investment for the long-term, stocks historically do not provide good returns in the short-term. In fact, stocks can drop significantly in value in a days time. For instance, in 1914, on December 12th, the stock market dropped 24.4% in one day.
3. The Greater the Risk, The Greater the Return
If you want a higher return on your investments you’ll have to take on more risk. Stocks are considered to be of higher risk as compared to bonds. Also, long-term bonds tend to be riskier than short-term bonds because your money is tied up for a longer period of time.
4. Stock Prices can Fluctuate for a Variety of Reasons
Stocks prices can go up and down for many reasons, the main reason is based on a stock’s fundamentals such as earnings. Although, there are many other factors that can change a stock’s price, like fear, wars, interest rates, and even things we cannot control such as the weather.
5. Consider Interest Rates when Investing in Bonds
As a rule of thumb, when interest rates increase, bond prices fall. In contrast when interest rates fall, bond prices go up. This is another reason long-term bonds are considered to be riskier compared to short-term bonds.
6. Stocks can help Protect your Investments from Inflation
Investing in the stock market can hedge your investments from inflation.
A good portfolio is a diversified portfolio. Having all your money in one type of investment such as the stock market is considered risky because if the stock market drops, your entire investment drops. This is why it’s good to have a mix of stocks and bonds and other types of investments in your portfolio.
The mix of diversification for your portfolio is usually determined by your personal risk level and generally your age.
8. Consider Index Funds
If you’re not sure how to value and pick individual stocks you may want to consider index funds. When you invest in an index fund you’re essentially investing in the entire market.