In order to select investments that will meet your growth and/or income requirements, it is imperative that you understand what your options are and how those options put your money to work.
The degree of risk varies greatly from one investment to another. For example, stocks have the potential for significant growth but are subject to volatility. Bonds tend to be less volatile, making them more suitable for generating income, though they offer limited potential for capital appreciation. Treasury bills, certificates of deposit (CDs), and money market funds are typically considered low-risk and may be insured, but they may fail to keep pace with inflation over time.
Consider Your Risk Tolerance and Needs
Generally, starting to invest at a younger age provides a longer time horizon to reach your financial goals, allowing for greater exposure to risk.
For instance, if you're in your twenties and just starting your career, you may be able to adopt a more aggressive investment strategy aimed at long-term growth. Aggressive investing involves choosing investments with the potential to generate higher returns over time. However, these investments often come with greater short-term risk due to price volatility.
If you're in your late 50s or 60s, you'll typically want to be more cautious about risk, as your portfolio may not have enough time to recover from a market downturn before you begin drawing on your retirement funds.
Upon retirement, your goal is not only to achieve continued growth while limiting investment risk but also to ensure a reliable income stream that can cover a portion of your living expenses. These are not hard-and-fast rules—there’s no one-size-fits-all approach to selecting investments. For instance, even a young investor may need to avoid high-risk investments if they’re still in school or burdened with significant debt.
Conversely, there may be situations where assuming more risk later in life is appropriate, depending on your goals and financial position. It's important to fine-tune your investment strategy to match your individual needs and circumstances.
