When you have excess cash flow and assets to invest, you can choose from a vast number of different types of investments. This can be a daunting task. There are so many options, and in many cases, they’re very complex. In addition to understanding how different investments work, investors need to know if investments are suitable for their particular needs and risk tolerance. Every investment has its characteristics, objectives, and level of risk. In addition, fee structures and costs vary widely. Knowing how to choose the right investments is a multi-faceted decision that deserves careful consideration. Special care should be taken to evaluate potential investments to ensure that they match your specific objectives and risk tolerance.
How to Choose the Right Investments
Investing by Risk Tolerance
Investors generally assume low risk, moderate risk, or high risk options. Here are some examples of choices from each category.
Low-risk tolerance: Are you willing to assume a small amount of risk in order to achieve a return slightly better than what you could earn from your savings vehicles? If so, you could choose government securities, mutual funds, or ETFs that invest in government securities or high-quality corporate bonds. Some balanced mutual funds are also relatively stable for low-risk investors.
Moderate risk tolerance: For investment returns of more than 6 or 7%, you will need to accept the possibility of a similar decline in value. Corporate bond funds, equity index funds, balanced mutual funds, large-cap stock funds, and utility stocks all provide moderate growth potential with relatively low volatility.
High-risk tolerance: If you’re seeking rates of return over 10%, you will have to expect higher market volatility. This also means possibly enduring steeper declines. Mutual funds that invest in small to mid-cap-sized stocks can achieve high returns. However, their prices fall much harder in market declines.
Investing by Objective
Different objectives that investors seek include:
Income: Government bonds, government, and high-quality corporate bond funds, high-yield bond funds
Income and growth: Equity income funds, funds that invest in utilities, balanced funds, REITS, dividend exchange-traded funds
Growth: Growth stock mutual funds, exchange-traded-funds, precious metals funds
Tax advantages: Municipal bonds and tax-exempt funds; deferred annuities
Growth and income for retirement: Target date retirement funds, dividend exchange-traded funds, equity income funds, annuities
Investing by Time Horizon
What does your timeline look like?
Short-term (1 to 5 years): Cash or savings accounts, CDs
Intermediate term (5 to 15 years): Stable investments such as bond funds, index funds, balanced funds, and large-cap/Blue chip funds.
Long-term (15+ years): Any of the above investments can be combined with higher-risk investments to create a balanced and diversified long-term portfolio. Aggressive stock funds, international funds, emerging market funds, sector funds, and even individual stocks, when added as part of an overall asset allocation strategy, can boost your portfolio returns over the long term.
Any investment strategy should include a mix of investments with varying characteristics and risks. This allows you to create a diversified portfolio that is balanced to suit your specific objectives and risk tolerance. Diversification through a mix of different asset classes is also the most effective way to minimize risk and produce stable returns. It is highly recommended that you understand your risk tolerances, objectives, and time horizons. This will help you determine the mix of assets that is best suited for you.
Need Investment Help?
Still wondering exactly how to choose the right investments? At Stewardship Trust Advisors, we’re here to help you wisely invest your hard-earned money. With a deep understanding of the available options, we’ll help you make a choice that sets you up for future success.
You don’t have to wonder if you’re making the right choices with your finances. We’re here to partner with you and guide you through the journey to and through retirement. Ready to get started? Schedule a consultation today.
These weekly articles which are produced and distributed by Pilgrims Capital Advisors, Inc. contain information on topics about investing, tax planning, estate planning, asset allocation, insurance, and many other financial subjects. Please note that they are very general and must be applied to your own individual circumstances through the services of a trained or licensed professional who specializes in these areas. If you have questions or needs related to the subject matter of this article please contact us by clicking on the link below and we will point you in the right direction.