Tip #2: Know How Much Risk You Are
Willing to Take On
There is something in investing that we
call the "risk-reward complex." Generally speaking, the
more risk that you are willing to take on with an investment, the
higher you should expect to be compensated in return.
For example, an incredibly safe
investment like a government bond may only return 1-2% per year,
whereas an investment in a real estate stock may return 15-20% per
year. Why is this? Since the real estate stock carries much more
inherent risk, investors require that this investment pay a higher
return than government bonds that are incredibly safe.
Of course, there are points where the
risk-reward dynamic is not balanced. For example, there are a type of
investments called "junk bonds" that can return as much as
30-40% a year on your investment, but they are so incredibly risky
that it is almost impossible to pick a junk bond that will survive.
As a result, the reward isn't balanced with the risk. We tend to try
to stay away from these types of investments.
It is important to get a good return on
your money, but it is also very important to sleep well at
night without worrying about investments. As a result, you should know your personal risk tolerance level, as this
will help you to make decisions on which stocks, bonds, and other funds to
invest in for retirement.
Tip #3: Know Your Time Horizon
For those of you who have never heard
the term "time horizon" before, it is simply a way of
saying, "How long until you need the money?" The answer to
this question is different for everyone. Some of us have $10,000
sitting around that we can throw into the stock market and leave
there for 20 years. Others of us couldn't bear to spare more than $20
each month to invest.
Depending on your personal
situation, you will have a specific time horizon for each investment
that you make. For example, if you have $10,000 to invest today but
you need the money in one year, then it may not be best to invest in
the stock market. Why? Because there is a very good possibility that
the stock market could be lower in value one year from now than it is
today, even though it is basically a guarantee it will be higher in 10 years.
In that type of situation, it would be
better to put your money into a short-term investment that is safe - something like a certificate of deposit from a bank
or a 3-month T-bill from the US Government.
Knowing your time
horizon helps you to determine what investments you can
make. As another example, if you find an investment you believe will
have an average return of 10% over the next five years, then you will want to stay locked into
that investment for five years. The average return may be 10%, but it may go down the first year by 5% and then go up by 20% year 2.
If you cannot afford to
invest the money right now due to other constraints, then you will
need to find a different investment.
Tip #4: Get a Personal Financial
Adviser on Your Side
The investing world is
complex and the kinds of investments that are available is shifting
all of the time. Add this to the fact that humans are very
emotional beings, and become even more so when dealing with their
money. So for most people, investing for retirement is a difficult process.
That is why one of the smartest
investment decisions you can make right off the bat is to find a personal
financial advisor that you trust, who can guide you. This person
will be able to help you define your financial objectives, will be
able to educate you on the different kinds of investments, and can
talk with you to determine your suitability for different kinds of
While many financial advisors will
charge a small yearly fee or a per-visit charge for their services, you
will find that having the help of a trained finance professional on
your side is an invaluable tool to have.
Furthermore, it is important to have
someone working for you who can look at your financial situation
holistically and neutrally to determine the best-fit options
as you save for retirement.
The Truth: There is No One Answer for
Investments are not as black and white as many
would have you to believe. They are many nuances, many of which are difficult to understand, and whether or not they are
good for you depends on a wide variety of factors.
Still, it is incredibly important that
you begin to save early and often because compound interest and time
are your greatest allies when it comes to saving for retirement. As
you begin this journey, if you will follow the tips listed above, we
believe that you will experience increased success in your investing
Andrew Altman is the editor-in-chief of SlickBucks.com. SlickBucks is dedicated to people who want to learn more about how to grow their financial wealth and achieve
their financial goals by investing. For better money management,
Andrew shares practical advice, reviews, and strategies for both
investing and saving money.