July 2008: Invest to Save
This month's e-Wealth Coach is John M. Gannon, Senior Vice President for Investor Education at the Financial Industry Regulatory Authority (FINRA) and Executive Director of the FINRA Investor Education. FINRA is the largest non-government regulator for all securities firms doing business n the United States. Prior to joining FINRA, he was Deputy Director of the Securities and Exchange Commission's Office of Investor Education & Assistance.
Dear Saver,
When it comes to investing, staying mindful of a few basic concepts will go a long way toward lifelong financial fitness. Here are five tried and true investment principles that should serve you well.
1. Do your homework. Know who you are as an investor before you invest. What are your goals? What is your time horizon? And what level of risk are you comfortable taking? Most investors have a mix of near-term and long-term goals—buying a new car or home, paying for college, or building a retirement nest-egg. FINRA, the Financial Industry Regulatory Authority, offers a wealth of unbiased online resources to help investors set and reach their goals, including Smart Saving for College and Smart 401(k) Investing at www.finra.org/Investor.
2. Understand risk. Virtually every investment carries some degree of risk—and there’s always a trade-off between risk and return. To reap the financial rewards of investing, you have to be willing to take some risk. One of the biggest risks you may fall prey to, however, is trying to avoid risk altogether. If you invest very conservatively or don’t invest at all because you’re afraid of losing your principal, you become vulnerable to inflation—which can erode the value of your interest-bearing savings and investments over the long-term.
3. Diversify. You’ve probably heard the expression “Don’t put all your eggs in one basket.” Diversification puts that advice into practice by spreading your portfolio both among different asset categories—including equities (stocks or mutual funds that invest in stocks), debt (bonds or bond funds) and cash—and within each asset class. Diversification helps protect the value of your portfolio in the event that one or more of the investments you own performs poorly.
4. Know that fees matter. Whether you buy stocks, bonds or mutual funds, or even if you invest in an employer’s retirement plan, it’s virtually certain you will have costs associated with your investment. These costs have a direct impact on the amount of money your investment will generate for you. For investments that have costs over time, such as mutual funds, the higher the fees and expenses, the less real return you make on your investment. FINRA’s Mutual Fund Expense Analyzer, at www.finra.org/fundanalyzer, allows you to compare up to three funds and to see the impact of fees and expenses on fund performance over time.
5. Invest for the long term. Markets go both up and down. And while investing can sometimes feel like a rollercoaster ride, investing for the long term is, as a general principle, a solid course of action. In most cases, time is one of the investor’s best friends. So once you’ve made your decisions and invested your money, consider staying put. Don’t panic in a bear market or get cocky in a bull market.
Summing Up
For more information on saving and investing, visit www.finra.org/investor. If you are in the armed services, go to www.saveandinvest.org/military.
Sincerely,
John Gannon
Executive Director
FINRA Investor Education
