How to think about investments
People generally invest money in the hopes of growing it into a larger sum over time. To decide which investments are right for you, you need to ask yourself some important questions. What is your investment goal? Is it short-term—like wanting to buy a home or do some major renovations in the next few years? Or long-term—like wanting to retire by a certain age? Your goals and timeframe can help you decide which investments could help you reach those milestones.
What are your goals?
Financial goals are different for everyone. You may be looking to purchase a home, save for a child’s education, or save for retirement. You could be planning to open your own business once you’ve got enough capital. Once you’ve had a chance to clearly define your goals, you can move on to planning how—and when—you could accomplish them.
What is your timeline?
Typically, the shorter the time period you have, the more conservative (less risky) an approach you may wish to take. If you’re going to need the money relatively soon, you may want to make sure it’s readily available to meet your needs.
On the other hand, if you’re looking to invest for a goal with a longer time horizon and have a higher risk tolerance you could consider a more aggressive (which may have a higher potential risk, higher potential reward) investment strategy. This could give your money a chance to grow at a potentially higher rate over time.
Types of investments
Depending on your financial goals, you may choose a particular type of account, like an IRA for retirement, or a 529 for funding education, or a brokerage account for a more flexible goal like buying a home. Within these accounts, you may divide your investments among different assets, such as stocks and bonds, or a mix of both. Historically, stocks often have a higher rate of return over time compared to bonds, but they also typically carry more risk. Bonds tend to have a lower return than stocks over time, but also carry a lower risk and could help lessen overall portfolio volatility.1
Understanding diversification
It sounds complex, but diversification doesn’t have to be difficult to understand. You’ve probably heard the expression “don’t put all your eggs in one basket!” That’s the basic idea behind diversification. A combination of different types of investments may help you reduce overall risk in your portfolio.* Additionally, holding a large number of shares of a single stock or asset may expose your portfolio to greater risk.2 You can also look to diversify your portfolio with a mix of mutual funds, exchange traded funds (ETFs) or target date funds (TDFs), which invest in a collection of assets.3 Your goal is to have the right mix for you. Investing always carries some level of risk—the key is to find a level of risk you can tolerate while choosing assets that could help you reach your financial goals.
Your advisor can help you set financial goals, according to your timeframe and your tolerance for risk, as well as explain diversification strategies for your portfolio. Different types of accounts offer different investment options, so working with an advisor to understand how these investments work may help you design a portfolio that suits you.
* A diversified portfolio does not ensure a profit or protect against a loss
1 https://www.forbes.com/advisor/investing/stocks-vs-bonds/#:~:text=While%20stocks%20are%20equities%2C%20bonds,lending%20money%20to%20the%20issuer.
2 https://www.forbes.com/sites/kristinmckenna/2020/09/17/if-you-own-too-much-stock-in-one-company-its-a-good-time-to-consider-diversifying/?sh=252798641533
3 https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset
Based on How to think about investments by Goldman Sachs Ayco Personal Financial Management, © 2023 Goldman Sachs Ayco Personal Financial Management.
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