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CHOOSING THE RIGHT INVESTMENTS

June 4th, 2010

Like every investor, you want to choose investments that will provide the growth and income you need to meet your financial goals. To do so, it is important to understand your investment choices and how different types of investments put your money to work.

It is equally important to understand yourself as an investor.  A portfolio that is right for someone else may not be best for you. The factors that make a difference are:

  • your age
  • your goals, or what you want to accomplish by investing
  • the timeframes for your various goals
  • your attitude toward risk, i.e. your risk tolerance

Once you have devised a strategy for choosing investments appropriate to each of your goals, you have taken a major step toward meeting them.

General Rules of Investing

As a general rule, the younger you are and the more time you have to reach a financial goal, the more investment risk you can afford to take.

On the other hand, when you are in your late 50s or 60s, you probably will want to exercise more caution about taking on investment risk, since your portfolio may not have a chance to recover from a market downturn before you need to start drawing on your retirement assets. When you retire, your goal is not only providing continued growth while taking limited investment risk but also ensuring that you have a stream of income that can cover a portion of your living expenses.

But these are just guidelines. No single approach to choosing investments will work for everyone or will be right for every situation. You will want to tailor your strategy to your own unique needs and circumstances.

What does make sense for all investors is concentrating on investments that, however different they are from each other, share these important characteristics:

  • The investments are easy to evaluate because there’s lots of information about them. Regulators require disclosure of certain information to investors through documents such as mutual fund prospectuses, corporate filings for stock issued by public companies that trade on the major stock markets, and prospectuses or offering statements for bonds.
  • The investments are easy to buy and sell, either through a brokerage account or in some cases directly from the issuer. Thinly-traded stocks or securities that are not listed on a major exchange are rarely a good idea for most investors.
  • Sales charges for buying and selling the investments are clearly explained, as are any fees for selling within a certain timeframe.
  • The investments are registered with the SEC or your state’s securities regulator, and the salespeople who sell them are licensed by FINRA.
  • You understand the risks of the investment and how it works.
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