Investing is a key component of long-term financial planning. By choosing the right investments, investors can ensure their money outgrows inflation, making it possible for them to realize their retirement goals and live comfortably long after they have stopped working.
Risk is a part of investing, and many veteran investors recognize that. However, the fear of losing hard-earned money might compel would-be beginners to avoid the markets altogether. That can be a costly mistake, and it’s one research suggests millennials are making, choosing to keep their money in savings accounts — which provide very little return in terms of interest — rather than invest in the markets.
According to a recent analysis from the online financial resource NerdWallet, a 25-year-old millennial who is not investing today and does not invest until they retire at 65 could lose out on more than $3.3 million in retirement savings.
It can be nerve-wracking for novices to begin investing their money, but these three investment strategies can help calm those nerves and pave the way for a bright financial future.
Identify your risk tolerance
Young investors may be told that they’re in prime position to choose risky investments because they have fewer responsibilities than older investors, and more time in the workforce to make up for losses. While that’s true, young investors should only be as risky as they’re comfortable being. The financial experts at Principal advise beginners to identify their risk tolerance before investing. Investments with a high potential for return, which might include emerging markets and limited partnerships, also generally have a higher potential risk for loss, and vice versa. Investors should only accept a level of risk they’re comfortable with.
Diversify your investments
Principal notes one way to manage risk is choose a mix of investments from various asset classes. For example, stocks and bonds traditionally move in different directions. So when stocks are up, bonds may be down, and vice versa. Investing in different types of assets is known as diversification, which can help investors protect themselves against risk.
Make changes as you age
As investors age, their aversion to risk should grow. The closer you get to retirement, the closer you are to needing all the money you have invested and earned over the years. Speak with a financial planner about how to reallocate your investments as retirement draws near.
– Courtesy Metro Creative