Guidelines for Successful Investing
As an investor today, you have a larger range of investment choices than ever before, including stocks, bonds, mutual funds, United States Treasury securities & savings bonds, options, commodities, commodity futures, real estate investment trusts (known as REITs), and variable annuities. In today’s economic environment, it is essential to research your options before you invest. It is also important to remind yourself that every single type of investment involves a degree of risk. Most investments are not insured by the federal government, even if you acquire them through a bank or credit union which provides federally-insured savings accounts.
Here are some areas to consider before you invest:
- How quickly you can convert your investment back into cash - Stocks, bonds, and mutual fund shares can often be sold at any time, yet with no guarantee as to the degree of return on your investment. Other financial products, such as limited partnerships, have stringent restrictions on when and how often you can liquidate your assets.
- The estimated time until you will receive a positive return on your investment - Many bonds promise a fixed return, albeit at a lower rate than some other investments, while most other securities’ returns vary with changes in the market. An additional piece of advice is that successful investments in the past are not guaranteed to do well in the future.
- The amount of earnings you can expect over a period of time - Some investments, including stocks and real estate, have real potential for earnings and growth in value over time. It is important to estimate the amount of potential earnings over a specified time period. Another area to consider is how you will derive your income from a specific investment – from interest, dividends or rent.
- Analyze the amount of risk involved - With any investment, there is always the risk of not getting the amount of your original investment back, or realizing your estimated income. Remember the general rule that the higher the potential for return, the greater the risk.
- Keep your investments diversified – Depending upon the situation, certain investments are preferred to others. For example, when interest rates go up, bond prices often go down. However, investing in a variety of securities can keep you more sheltered from risk.
- Determine if specific investments have unique advantages – For example, U.S. Savings Bonds are exempt from state and local taxes, and are federally-insured. Municipal bonds are exempt from federal income tax as well as the state income tax in some states. To save for college expenses or for retirement, tax-deferred investments are often a viable option to delay or even possibly defer income taxes.
The Securities and Exchange Commission (SEC) requires public companies to disclose their financial information. In addition to their online resources, you can obtain free publications by calling their toll-free Investor Information Service at 1-800-732-0330. NRA) also
There are several companies, including Standard & Poor’s & Moody’s Investors Services, which rate the financial condition of corporations as well as municipalities which issue bonds. You can find their ratings online and at public libraries.
For ratings of mutual funds, some valuable resources are: Kiplinger’s Personal Finance, Money, Consumer Reports, Smart Money, and Worth. A valuable tool for evaluating your expenses is the Mutual Fund Expense Analyzer provided by the Financial Industry Regulatory Authority (FINRA) at www.finra.org. FINRA’s site also provides current information for many stocks, bonds, mutual funds, and other securities.