Investment Strategies

Interactive Video

[A smiling young woman sits at a desk typing on a calculator with books stacked beside her, pencils in a pencil holder, and a to-go coffee cup.]

[Video speaker:]

When you’re ready to start investing your money, determining your financial goals and risk tolerance will help you choose the right investment strategy to meet your needs. Any investment involves risk. The question is: how much risk are you willing to take?You should consider several factors to help you determine your risk tolerance. Think about things like: What are your financial goals and when do you want to achieve them? 

Growing money fast vs. saving for retirement are different time horizons. How old will you be when you start investing? This means how much time will you have to reach your goal? You usually need to take more risk if you have a shorter timeframe to achieve your goal. How much risk are you comfortable with? This means how much are you willing to lose or can afford to lose, and how nervous will you get with the ups and downs of investments? 

Risk tolerance has three categories: conservative, moderate, and aggressive investors. Now, which type of investor are you? Let's see what you think. If you are a conservative investor, you prefer low-risk and stable investments. Money invested is generally safer with less fluctuation. This is a good choice if you want to protect your money; however, you must be okay with potentially lower returns on your money. You should consider putting your money in things like high-yield interest savings accounts, certificates of deposit known as (CDs), or government or high-quality corporate bonds. Money in conservative investments grows slowly. 

If you consider yourself a moderate risk taker, you're okay with some ups and down, hoping your money will grow. You're in the middle, seeking some balance between financial safety and growth. That translates to a mix in investments like stocks and bonds. Stocks normally have more potential for growth, while bonds offer stability. Again, you need to give your money time to grow. You will see some ups and downs but generally you will see better growth over time than conservative options. You should consider putting your money into diversified mutual funds, more stable stocks (like blue-chips), and some bonds. 

Now, if you are an aggressive investor, you like risk and are aiming for potential higher than average returns on your money. You're willing to accept big ups and downs. If you want to ride the wave of the market, invest in more stocks. Get ready for the possibility of losing money, but this approach can also offer the possibility of the highest returns over the long haul. Remember, your risk choices can change over time as your financial situation and goals evolve. Select a risk level that matches your comfort and financial objectives. And, you don't have to pick just one category; you can create a diversified portfolio that combines elements of each category to strike a balance that suits your needs.

[Dow Jones 100 year historical chart of stock market’s ups and downs.]

Narrator: The stock market, mainly measured by the S&P 500 and the Dow, usually gives investors an average of 10 percent return on their investments every year. This is much higher return than what you'd get from safer investments like bank accounts or bonds, which typically give you less than 3 percent in returns.

[Online text]: Keep your money invested to get the highest returns.

[A money plant at different stages of growth. The plant starts as a young sapling and grows into a mature plant that is being watered with a watering can.]

And the secret is simple: To get those rates of return on your money, you need to keep your money invested long enough.

[On screen text]: Rule of 72, invested at 10%, 7.2 years (72/10=7.2)

The rule works like this: For every $1 you invest at an annual fixed interest rate of 10 percent, it would take 7.2 years to double your money, or turn that $1 into $2.

[On screen text]: Rule of 72, 72/8=9

For example, Roy has invested some money in a mutual fund, and he’s curious about how long it will take for his investment to double. Using the Rule of 72, he can divide 72 by the expected annual return rate of 8 percent. The result, 9, tells him that it will take approximately 9 years to double his initial investment if it continues to grow at the same rate.

[A smiling young woman sits at a desk typing on a calculator with books stacked beside her, pencils in a pencil holder, and a to-go coffee cup.]

A keyword in investing is “average.” The market fluctuates all the time, so you have to develop your investing strategies based on averages to plan.

[On screen text]: All investments come with some risk.

[Middle-aged Woman checking her investment portfolio on her tablet.]

Investment strategies are akin to planning for your future. You want to have a strategy based on what you want in the long run, how long you can leave your money invested, and how much risk you're comfortable with. Remember: All investments come with some risk of losing what you put in.

[A young couple speaking with a financial advisor with text, “30-year investment”. The picture is replaced by an older couple speaking with a financial advisor with text, “10-year investment”.

Your age matters too. Time works to your advantage, because money has time to grow and you get better results in the long-term. So, it’s always best to start as soon as you can, but never think it’s too late. Just adjust your investment strategy based on where you are in life, what your money goals are, and when you want to achieve them.

[Smiling older woman wearing a backpack, hiking in the mountains.]

Narrator: The most common investment strategy is saving for retirement. That may be decades away, but don’t forget: Time equals money!

[On screen text]: 401k or 403(b) employer contributions are free money.

[Illustrated egg with a dollar sign on it in a bird’s nest.]

[On screen text]: individual retirement account (IRA).

[A larger illustrated egg with a dollar sign on it in a larger bird’s nest.]

If your employer offers a retirement plan, such as a 401(k) or 403(b), as a benefit and contributes to that plan, that’s free money for you! These plans are usually set up with mutual funds, which offer a mix of investments to balance risk. Or, you can set up your own account, such as an individual retirement account, or IRA.

[Animation: An umbrella with money and the words “401k and IRA” under it. A hand reaches onto the screen to withdraw the money from under the umbrella. Then a lightning bolt strikes the umbrella and text appears “10% penalty”.]

These tax-sheltered or tax-deferred plans are designed for long-term investment goals.  Money can be deposited pretax into these accounts, but it can’t be touched until retirement age. If money is withdrawn early, there’s a 10 percent penalty and income tax is charged on the money!

[A couple sitting in front of a laptop having a discussion.]

[A pie chart with half the chart labeled with 3 dollar signs. One-quarter of the chart is labeled with 2 dollar signs. The last portion of the chart is divided into eighths with one-eighth labeled with a single dollar sign and the final eighth labeled with a single dollar sign.]

If you are going to have a “go” at the market yourself, consider starting small with fractional shares that are affordable.

[Person with a stack of cash sitting on the table, typing on a calculator.]

Another simple strategy is “buy and hold.” It’s just what it sounds like: Buy an investment and hold it indefinitely, but for at least 3 to 5 years. This gives the money time to grow.

[A magnifying glass hovering in front of an illustrated laptop with buy/sell options on the screen.]

Another option is to buy exchange-traded funds, or ETFs, that use one of the popular indexes such as Nasdaq, the Dow, or the S&P 500. You can look at well-established and reliable stocks, also known as blue-chip stocks, or other popular stocks with a good track record for potential returns.

[Animation, Three icons: mutual fund, IRA, and stock market. Each icon has a money sack icon underneath. The stock market icon is crossed out and the money disappears but the more money sac icons appear under the first two icons.]

Regardless of your approach, it's a good idea to diversify your investments by spreading your money across different types of investments. This way, if one investment doesn't do well, others may still perform, helping protect your overall investment.