While the SEC cannot recommend any particular investment product, you should know that a vast array of investment products exists - including stocks and stock mutual funds, corporate and municipal bonds, bond mutual funds, lifecycle funds, exchange-traded funds, money market funds, and U.S. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. ![]() If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents. The reward for taking on risk is the potential for a greater investment return. If you intend to purchases securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your money. Don't let anyone tell you otherwise: All investments involve some degree of risk. You've probably heard the phrase "no pain, no gain" - those words come close to summing up the relationship between risk and reward. When it comes to investing, risk and reward are inextricably entwined. In the words of the famous saying, conservative investors keep a "bird in the hand," while aggressive investors seek "two in the bush." A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. ![]() The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. The process of determining which mix of assets to hold in your portfolio is a very personal one. Asset Allocation 101Īsset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. Let's begin by looking at asset allocation. This publication will cover those topics more fully and will also discuss the importance of rebalancing from time to time. If that makes sense, you've got a great start on understanding asset allocation and diversification. By selling both items- in other words, by diversifying the product line - the vendor can reduce the risk of losing money on any given day. And when it's sunny, the reverse is true. ![]() Street vendors know that when it's raining, it's easier to sell umbrellas but harder to sell sunglasses. ![]() After all, when would a person buy both items at the same time? Probably never - and that's the point. How did you learn them? Through ordinary, real-life experiences that have nothing to do with the stock market.įor example, have you ever noticed that street vendors often sell seemingly unrelated products - such as umbrellas and sunglasses? Initially, that may seem odd. Even if you are new to investing, you may already know some of the most fundamental principles of sound investing.
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