How to Choose the Right Investments
When you have excess cash flow and assets to invest, you can choose from a vast number of different types of investments, which can be a daunting task due to their sheer number and, in many cases, their complexity. In addition to understanding how different investments work, it is essential for investors to know if investments are suitable for their particular needs and risk tolerance. Every investment has its own characteristics, objectives and level of risk, and fee structures and costs vary widely. Special care should be taken to evaluate potential investments to ensure that they match your specific objectives and risk tolerance.
Investing by Risk Tolerance
Low risk tolerance: If you are 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, 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 and endure 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
Seeking income: Government bonds, government and high quality corporate bond funds, high-yield bond funds
Seeking income and growth: Equity income funds, funds that invest in utilities, balanced funds, REITS, dividend exchange-traded funds
Seeking growth: Growth stock mutual funds, exchange-traded-funds, precious metals funds
Seeking tax advantages: Municipal bonds and tax-exempt funds; deferred annuities
Seeking growth and income for retirement: Target date retirement funds, dividend exchange-traded funds, equity income funds, annuities
Investing by Time Horizon
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 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 to help you determine the mix of assets that is best suited for you.
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