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A Beginner's Guide to Investing

For most people investing is necessary to build a nest egg that can support many years of retirement. Whether seeking professional help or attempting to do it yourself, understanding basic investment terms, products, and strategies is important. The myriad of investment products that are available in the market today can be confusing and it can be easy to make mistakes that can have a significant impact on your ability to retire comfortably. 

Types of Investments

There are numerous investment options and products available in today's financial marketplace--and each can help investors in different ways, depending on their specific goals, time horizon, and risk tolerance.

When considering any financial product, though, it is essential to know both the upside and the potential drawbacks. Otherwise, you could end up locking in an investment that doesn't meet your financial goals in the long run. The returns might be too low, or fees might be too high, to keep up with inflation. Or the risk may not be appropriate for your objectives.

Some of the more common types of investments include:

  • Individual Stocks - Investors who purchase individual stocks are actually buying into the underlying company that is represented by the stock. Typically, investors purchase "shares" of companies, providing them with equity. The value of an individual stock is tied to the profitability of the issuing company. While investing in stock can allow you to obtain growth in your portfolio, these investments also come with some risk in the form of short-term volatility. Because a sound understanding of each company is important for stock investments, for most investors it's best to work with a financial advisor who can recommend the best stock or stocks to construct a well-diversified portfolio.
  • Bonds - Companies and governments issue bonds (i.e. borrow funds and pay interest) to fund their day-to-day operations or to finance specific projects. When an investor buys a bond, they are actually loaning money for a certain period of time to the issuer. In return, typically bond holders get back their initial amount of investment, plus regular interest payments. Generally, the value of bonds move in the opposite direction of interest rates. For example, when interest rates fall, bond prices rise, and vice versa. The value of a bond is also tied to the ability of the issuer to meet future payment obligations. Many retirees use bonds for regular income payments or to lower short-term volatility relative to stocks. But bonds may be more volatile in the long run due to fluctuations in interest rates.
  • Mutual Funds - Mutual funds allow a way for investors to "pool" their assets into a wide variety of investments such as stocks, bonds, and other underlying financial vehicles. This can allow a very cost-effective way for smaller investors to diversify their portfolio where investing in individual stocks or bonds may be cost prohibitive. In return for this diversity and professional management, mutual funds may charge either an up-front or back-end commission, and always charge annual management fees. And remember, as with all investments, no matter how well a mutual fund may have performed in the past, this is not indicative of its future performance.
  • Annuities - Annuities have been touted as able to provide retirement income that you cannot outlive. This alone can provide peace of mind for many—especially retirees—who are concerned about outliving their assets in retirement. Yet, this guaranteed income comes at a cost, as these products are also known for their high surrender charges and inflexibility. An advisor who is well versed in annuities can help you determine whether or not an annuity is right for you, but high commissions make unbiased information difficult to come by.
  • Certificate of Deposit (CD) - Certificates of Deposit, or CDs, are a type of promissory note that is issued by a bank or other financial institution. These products provide their investors with regular interest over a set period of time. CDs are considered very safe and stable investments when held to maturity. Yet, with today's historically low interest rates, these products do not produce enough livable income for many retirees. As a pre-retirement investment these may be a poor match for investors that need significant growth or are decades from retirement.
  • Real Estate Investment Trusts (REITs) - A real estate investment trust, or REIT, is a corporation or trust that specializes in real estate investment. Some REITs own residential properties, such as apartment buildings, while others may specialize in the ownership of large shopping malls or warehouses. REITs can provide investors with exposure to diversified real estate investments beyond private residences, which can result in appreciation and income generation. Prior to investing in a REIT, though, it is important to understand how the underlying market can affect a REIT's value over both the short and long term. Private REITs can be risky long-term investment, while publicly-traded REITs listed on the stock exchanges may be volatile in day-to-day trading.

Investing for Retirement

When investing for or during retirement, it's important to use a strategy appropriate for your specific financial goals. It is important to keep in mind that financial advisors may be given incentives to sell particular products to their clients, regardless of whether or not the product best accomplishes an investor's goals.

Annuities, for example, are often recommended as an income-producing vehicle for retirees. However, these products are typically very complex, and can contain charges and fees that are not transparent—essentially reducing the potential return for the investor and potentially filling the advisor's pocket with large commissions. Other strategies may have similar results without the fees and possible complications.

Investment Terminology

In addition to understanding actual investment products, being familiar with investing terminology is valuable. Many of the large investment trading entities provide online resources to help investors better understand related terminology, such as NASDAQ's Glossary of Stock Market Terms or the SEC's investor education page. Likewise, for those who are considering retirement income vehicles such as annuities, a whole host of terms can become much better understood after reviewing an annuity glossary.

How to Get Started

Getting started with investing should begin with understanding and documenting your financial goals—including both short and long-term financial objectives such as the creation of a retirement fund, attaining a down payment for a home, or saving for a child's future college education.

After your financial goals have been determined, you can then proceed with a plan on how you will attain each. Choosing which products and strategies to use will be important decisions. Plot your course and then break the overall goals into short-term and easy-to-manage steps. Only with a disciplined strategy can you ensure long-term success.

Once you have started your investment program, it is important to regularly review your progress, as well as factor in any life changes that could have an effect on your investment goals. These changes may include a birth or death in the family, a marriage or divorce, obtaining or losing a job, or the purchase or sale of a home. 

Your portfolio may also need to be revised in order to adjust to changing market conditions. A good professional investment adviser can work with you to ensure your assets stay the course in both good economic times and bad. Regardless of your goals and time horizon, though, it is never too late to create or develop your investing strategy to improve your chances of success.

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