Investment Strategies
Investing for your future can be as simple as joining your company's pension plan or as structured as creating a diversified portfolio of stocks and bonds. By learning about various investment strategies, you can make sure that you are making informed decisions about how to manage your accounts. In Learn the Basics you'll find links to information that will help new investors develop a foundation of knowledge
Diversification
You've probably heard the advice: "Don't put all your eggs in one basket." This wise saying is telling you that it's important to diversify, or distribute your investments among different companies or securities. This tactic helps lower your investment risk because it may help even out the normal ups and downs of individual securities.
There are many ways to diversify your investments. You could personally choose a group of individual securities -- stocks of certain companies and government bonds, for example. This approach is time-consuming and difficult, however, for most investors.
Thousands of investors choose to invest in mutual funds as a method of diversifying their assets. The very nature of a mutual fund ensures that your investment is diversified because mutual fund managers pool the money of a multitude of investors to purchase an entire group -- or portfolio -- of investments. When you buy one share of a mutual fund, you are indirectly buying a small percentage of each investment owned by the fund. Each mutual fund has specific, stated objectives to help you reach your investment goals. Many investors take diversifying one step further by buying shares of several mutual funds with different investment goals.
Although you can invest in funds from many different companies, diversification usually can be achieved within one fund family that offers a broad range of funds and other important benefits, including:
| Ease in switching from one fund to another as your goals change. |
| Combined statements that make it easier to track your investments. |
| Single investor services team that's familiar with all your fund choices. |
Here's a look at how some investors may approach
diversifying their mutual fund investments:
| Names: |
Lisa and John Anderson |
| Ages: |
Both are 28 |
| Investment goal: |
College for their two children, Anne, 1; and
Elizabeth 2; and their own retirement at age 65. |
| Willingness to accept risk: |
High, because their investment goals are far in
the future. |
| Action: |
Decide to put most of their money in a growth-
oriented mutual fund with a small portion into an
income-producing fund to be used for emergencies. |
| Names: |
Carola and Peter Johnson |
| Ages: |
46 and 50 |
| Investment goal: |
Retirement at age 65. |
| Willingness to accept risk: |
Moderate |
| Action: |
The Johnson's split their money between a growth-
oriented fund, which will help boost their earnings,
and an income-oriented fund, which will help
preserve their capital. |
This example is for illustrative purposes only and is not intended to recommend a particular investment product. Looking at your own personal situation, including your age, investment goals, amount of time to invest to reach your goal, willingness to accept risk, and financial status will help you determine which mutual funds are right for you.
Risk and Return
"Am I willing to risk it?" How many times have you asked yourself that question when making a major purchase, changing jobs, moving to a new city or even in your personal relationships. There's some risk involved in just about everything we do, including investing.
With investments, "risk" often is defined as the possibility that your investment will be worth less when you sell it than when you bought it. It is inevitable that the value (or price) of most investments will go up and down. The change in investment value is called "price volatility."
When you invest in stocks, or stock mutual funds, the value of your investment fluctuates, depending on the price each share commands in the market every day. When you invest in bonds, or bond mutual funds, the value of your investment is influenced by interest rates: In general, when interest rates rise, the value of your investment decreases; when interest rates fall, the value of your investment rises. Bond prices are also influenced by the credit risk of the issuing government, agency or company.
Generally, the more aggressive the investment is in pursuing higher returns, the greater the investment's price volatility - or risk - especially during shorter time periods. The greater the risk, however, the greater the potential for stronger investment performance over the long term.
This principle is illustrated when you look at the historical investment results of bonds and stocks. While past performance is not a guarantee of future results, stocks have historically provided higher returns over time, but with greater price volatility along the way. Bonds have provided lower returns than stocks, but with less price volatility.
Investing Long Term
Wouldn't it be great if you could always buy shares of your mutual fund when the market is at its lowest point and sell them when it is at its highest point? Your good timing would always yield a profit on your investment.
Realistically, though, it's next to impossible for anyone to know when the good days and bad days in the market will occur. We believe that being a successful investor is more likely the result of time in, not timing of, the stock and bond markets.
When you invest for the future, it's important to understand the benefit of having time on your side
