Investing can be a little intimidating for people who are new to it. But it shouldn’t be. Investing is a means to getting things you want. There may be aspects that are unsettling. But, like rides at an amusement park, the scary part is usually temporary. And the end result can be so worth it! That should be comforting to first-time investors.
There’s so Much to do – Have a Plan
Remember when you were a kid and you ran through the entrance to the amusement park? There was no plan, you just figured that running would assure that you’d experience everything in one visit.
That’s not a great investment strategy. Before you run off and start throwing money at some hot performing mutual fund or meme ETF, establish goals and devise a plan to achieve them.
Your plan can be simple and might include goals like buying a house or saving for retirement.
The Ball Toss Game as Bucket Strategy
The key to making your plan work is to match the timing of your various goals with investments appropriate to finance them. The bucket strategy can help.
A bucket strategy has you consider goals and investments based on time frame. Some of your goals will happen within a year. Many could take a few years to achieve. Others will require decades to realize.
Now, think about this like it’s the ball toss game at the amusement park. The cups are essentially your buckets.
The close up cups might hold short-term investments. They should be relatively safe, like money market funds. Investments in the middle cups might include higher risk assets, like stocks and perhaps bonds with maturities between seven and 10 years. Long-term investments go in those last cups in the back. A higher concentration of risk assets (like stocks) may be fine for these. This is because their volatility (price swings) tend to smooth out over long time periods.
As you consider risk, think about rides at the park.
Bumper Cars, Roller Coasters and Risk
The bumper car experience is pretty tame. The ride is fun, but not very risky. Slow and steady with only fleeting excitement, bumper cars are the amusement park analogy of investments like bonds.
A roller coaster is a lot more exhilarating. But it’s completely predictable and a fitting analogy for stocks.
Stock prices and roller coasters rise and fall. This causes investors and park visitors anxiety. But it’s this volatility that makes both the roller coaster and the stock market work. Yet volatility is only scary on the ride down. And those moves are generally temporary. Roller coasters always take the ride back to the top of a hill.
History shows a similar path for the stock market. Except that for the stock market, over time, the moves up have outweighed the downturns. Performance of individual stocks can, of course, vary from that of the overall market.
Mix Things up – Asset Allocation and Diversification
Like the park visitors who want to combine the thrill of the roller coaster with the slow and steady ride of the bumper car, there are investors who want the returns of stocks and the relative safety of bonds, particularly shorter-term bonds. Luckily an investment portfolio can be configured to reduce risk without eliminating performance.
There are a couple ways to do this.
The first is to combine both stocks and bonds in your portfolio. Blending can create a portfolio with predicable risk and return parameters tailored to your unique requirements. This is called “asset allocation.” Asset allocation can also achieved using multi-asset or growth and income mutual funds.
The other way to reduce investment risk in a portfolio is to spread the dollars invested in stocks and bonds among many different securities. This is called “diversification,” which is one of the inherent benefits of mutual funds.
Time Flies When You’re Having fun…and Investing
When you’re a kid, there’s never enough time at the amusement park. But time goes by just as fast for investors too. That’s why starting the process now is so important.
And we can help. We’re available Monday-Friday 7:30am to 8:00pm (CT).
Call us at (800) 235-8396.