FINRA - Investor Information - Investor Brochure Series

Risks and potential returns vary greatly from investment to investment. Stocks offer you growth, but they can be volatile. Bonds provide you with income, but are also subject to volatility in the value of the underlying principal and lower potential earnings. Treasury bills, CDs, and money market funds are insured, but usually offer lower returns. It's time to take the information you've gathered on the principal types of securities investments, and apply this knowledge to the development of your personal investment strategy or plan.

Strategic investing involves allocating your funds in a variety of ways--diversifying among different plans. Once you've evaluated your investment goals, assessed how much money you can reasonably invest, determined your risk comfort level, and learned about your investment choices, you are ready to build a diverse portfolio of investments. A portfolio is the collection of all your investments: all the stocks, bonds, cash deposits, real estate, and so forth. Careful investing involves building a diverse portfolio--one in which your investments are spread over a range of investment choices. Because there are no guarantees for how your money will grow over time, diversifying investments can help protect you when some investments do not perform as well as others.

Investing in mutual funds allows you to diversify within a class of investments such as stocks or bonds without actively designating where the money should go among these individual investments. Once you make a lump sum investment in a mutual fund, a fund manager takes care of spreading that sum among a range of investment options. In exchange for their services, mutual fund companies generally charge you a fee, based on the amount of your yearly assets in the fund.

Individual investors, especially those with long-term investing plans who are willing to ride the market's highs and lows, may feel confident investing all or most of their money in stocks. Within the world of stocks, there are many ways to diversify as well. For example: you can invest in blue chip stocks--large, established companies with strong records of profit growth, that also often pay dividends. Growth stocks--often companies that are just starting out--provide another option. Growth companies, whose earnings are increasing at a rate faster than the industry average, are often smaller companies today, but may not be for long.

You can also diversify your stock investments by purchasing stocks in a variety of industries; balancing retail stocks with companies that provide essential goods and services--public utilities, for example--is a smart idea. Owning stock in a variety of industries offers some protection; when one industry is declining, another may be growing.

After examining the various ways to invest money, you have to decide what percent of your income you want to invest where. Like the other components of an investment plan, your need for a diverse portfolio may change over time.

Investment Options
	Yield Range in Recent Years	Financial Risk	Inflation Hedge	Liquidity

Stocks
Common	8-20%	Medium to High	Good	High
Preferred	5-9%

Bonds
Municipal	3-10%	Low to Medium	None	Varies
Corporate High Quality	6-11%	Low to Medium		Immediate
Junk Bonds	8-14%	High		to 30 Years

Mutual Funds
(Money Market,	0-16%	Low to High	Good	High
Fund, Stocks,		Depends on skill
Bonds)		of manager and
		fund objectives

Real Estate
(Home, Rental Unit,	0-20%	Medium	Good	Low to
Commercial Property)		to High		Moderate

Collectibles
(Art, Antiques,	Few	High	Varies	Low to
Precious	collections			Moderate
Metals, Gems)	yield profits

Futures
Contracts	0-30%	High	Good	High

This worksheet reprinted with permission and courtesy of Eastern Michigan University, National Institute for Consumer Education. The information is for general educational purposes and is not intended as specific advice for individuals.

Investment Strategy Factors

As you determine your investment strategy, here are four factors to keep in mind:

Factor 1:

Growth is the rate at which your money appreciates during the time it is invested. If you think you will need access to your funds sooner rather than later, look for an investment that provides a fairly safe, steady growth rate. High growth investments might be tempting, but are usually subject to substantial fluctuations and you might not be able to wait for an investment like growth stocks or mutual funds to decline in value, or depreciate before they grow again.

Long-term investments that are influenced by factors such as the inflation rate may lose money in the short term, but they can still grow over an extended time frame. What will matter is not a slow growth rate (or even a loss) during a particular period, but a higher growth rate over time.

When thinking about the growth of your investments over the long term, keep in mind the role of taxes in that growth. With long-term investments, your investment can grow tax-deferred if it is in an IRA, 401(k), Keogh, or other qualified retirement plan. Until you withdraw your funds from these plans, earnings remain untaxed. To learn more about 401(k)s, please read Smart 401(k) Investing.

Factor 2:

Yield is the interest or dividends paid on your investment. Like growth, it can vary in importance depending on your needs. If you are retired and your investment is funding your retirement, your investments should generate enough yield to let you live on the interest. Savings accounts tend to yield small percentages; bonds, on the other hand, can yield higher percentages, but their yield rate is affected by inflation. Stocks and stock mutual funds can yield the highest percentages but also have the greatest chance of loss.

Factor 3:

Closely related to yield, the third factor to consider is income. Does your investment, or the yield from your investment, make up a significant portion of your income? If so, you may want to be more conservative with your investment choices to ensure that the amount of yield it produces remains consistent and reliable. You should give careful consideration to where and how often you want to reinvest your money, as it could effect your financial security.

Certificates of deposit (CDs), for example, are safe and easily converted into cash. They generate regular, periodic, guaranteed income from their interest.

If you are retired, your investments may be your primary source of income. Retirement professionals have strategies and formulas to help you gauge what income you need, or will need, to maintain a particular lifestyle in retirement. A general rule is that you should plan on needing an income equivalent to 70 to 80 percent of your net salary. However, factors such as the number of planned years of retirement and the level of inflation can influence this figure. If you are retired, it is generally more important that you select investments that produce income rather than growth.

Factor 4:

The fourth factor to consider is risk. Simply put, risk is the possibility of losing some or all of your investment. Each investor has a different risk tolerance. If you're a conservative investor, you should probably seek opportunities that offer safety and some measure of control over your returns--for example, savings bonds with a guaranteed rate of return. Conservative investors may choose to miss some high-growth opportunities by keeping their money in investments with more secure rates of return.

Aggressive investors will take some chances with a volatile, or fluctuating, market in the belief that they have the opportunity to receive a greater return on their initial investment. Of course, there are investors who fall in between conservative and aggressive; they may choose to invest partially in conservative outlets and invest other funds in riskier ventures. For personal investing, you need to determine your own comfortable level of risk and select investments that match.

Investment Choices

Investment Strategies