Where should you invest your money? With so many types of securities to choose from, this first choice may seem limitless.
But while the universe of investments you can choose from is large, that doesn't mean that every possibility is right for you. Making sure that your holdings match up with your investment objectives is important. Consider the following five factors.
One of the first things you should determine before picking an investment is when you will need the money. If you plan on withdrawing it in 30 years, the type of holding that is best for you could be different than if you will need it in three years.
If your time horizon is less than five years, your money should be invested in safer instruments like bonds and cash. And the longer the time span before you need your money, the more you can add aggressive securities like stocks. This could help ensure that if a bear market happens, money that you could need soon won't suffer extreme losses.
Do you have a goal for the money that you're investing? Is it earmarked for your retirement? Your child's college education? Or is it money that you use to nurture your love of stock trading?
If you have an account that is just for fun, seeing it fluctuate up and down may not bother you as much as if your account is for an important goal. And because of this, you can hold riskier investments inside of it. But if the account that you've set aside for buying a house loses a substantial amount of money, it may prevent you from reaching your goal and should be managed more conservatively.
Even if you have a long time until you need your money, huge swings up and down in your account value may be nerve-wracking. And if you find yourself anxiously biting your fingernails every time there is stock market volatility, your investments may be too aggressive.
Taking a quiz that evaluates how comfortable you are with risk can help you evaluate this. You can find out how much risk you can afford to take based on things like your age and how you've reacted to volatility in the past. From there you can pick an asset allocation model that lines up with your personal comfort level.
How much money you earn could factor into how your accounts are invested too. The more you make, the easier covering all of your bills may be whereas the less you make, the more likely it could be that you dip into savings occasionally to supplement your income.
If this happens, having more investments that don't fluctuate much could help prevent you from selling them at a loss. Whether or not you think your income will stay the same, increase, or decrease in the near future matters as well. The more you expect you will make, the more risk you can take. But if you could be getting a pay cut soon, there's a chance that your expenses could exceed your income and you'll need to use your savings.
In the event of an emergency or unexpected event, you should have funds available to cover your expenses. Experts say that having an emergency fund that covers at least six months of your expenses is a good guideline. If you don't have an emergency fund set up, the money may end up coming from your investment accounts. If this happens during a year of growth, it may not have much of an effect on your overall financial wellbeing. But if it happens during a period of stock market losses, it could make them even worse.
The more cash you have readily available, the more you can deal with losses in your accounts. If you have very little liquidity, limiting your losses as much as possible with less risky holdings could work out in your favor.
Your investment choices play a huge role in how quickly and favorably you can meet your financial goals. There are a lot of investments that you can choose from, but that doesn't mean that they are all a good fit. Finding the ones that are best suited for you and your needs is a vital step in your investment journey.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.