Basics of stocks, bonds, and mutual funds
Our guide covers the basics of stocks, bonds and mutual funds, and explains key strategies you can use to create and manage an investment portfolio.
If you know you should be investing, but you aren't sure where or how to begin, this illuminating guide is the place to start.
Investing
When you invest, your dual goals are accumulating valuable assets and increasing your income.
Investing means using the money you have to build a portfolio of assets that you expect to grown in value over time, provide current income, or, in some cases, provide both growth and income. Done wisely, investing can help you meet your financial goals—paying for a college education, enjoying a comfortable retirement, buying a home, or whatever is important to you.
Investing even a small amount on a regular basis has the potential to produce positive results over the long term. For example, investing just $96 a week for 30 years can add up to more than $400,000 if you have an average annual return of 6%. Return, which is typically reported as a percentage of the amount you invested, is the combination of change in an investment’s market value, up or down, plus any income it has provided.
There are two things to keep in mind about return:
It isn’t guaranteed. While it could be 6% or higher, it could also be less, or even negative, in some years, reducing the annual average.
To select investments to meet your goals, you need to understand what the choices are, the return that’s possible with different choices, and the risks you’ll take.
Basics of investing
if you concentrate on the principles, you’ll have the elements of an investment strategy.
As you make individual investment decisions, you’ll want to ask where each investment fits in your overall asset allocation and diversification strategies. You’ll want to evaluate the yield the investment may provide and the level of return it’s reasonable to expect. And you’ll want to assess how volatile the investment is likely to be and what risks you’ll be taking in adding it to your portfolio.
Taking these steps doesn’t guarantee that you’ll achieve the results you want, but it should help protect you from avoidable mistakes. Diversification is making several different types of investments rather than just one or two. Allocation is deciding what percentage of your portfolio goes into which categories of investment. Risk includes all the reasons you may have a loss or a weak return. Return is what you get back, based on what you invest, usually measured on an annual basis. Yield is the income you receive as a percentage of what your investment cost you.