Investment Basics

Often, the most difficult part of building an investment strategy is getting started. The tools in this section can help you understand the investment process and get you moving in the right direction toward building an investment strategy.

The reason people invest their money is so that they can make more money. This is called the return on investment. The best strategy for investing should be based on individual financial needs, investment goals and attitudes toward risk. It is important that you understand your own investment goals before deciding what type of investment you should pursue. You should ask yourself whether your goal is for safety of your principal, for long term growth, income or any other purpose.

It is equally important that you know how much risk you can tolerate. To know the answer to this question will help you determine your investment portfolio.

The result of your investment decision can either be predicted or unpredicted. If you invest in CDs and hold them to maturity, the investment return is the interest payment stated. On the other hand, the investment result is unpredicted when you invest in the stock market.

The general rule is that the higher the risk associated with the investment, the higher the return you should get. Historically, stocks consistently have been the best performing investments. There have been years, or a period of years, when stocks have lost money but they have also returned more money more often than any other investment.

It is important to understand that adapting an investment strategy that involves higher risk does not mean that this strategy will generate or ensure a higher rate of return. It only means that to invest in the stock market has the potential to earn higher rates of return. There has been one ten year period over which the S&P 500 has earned and annual rate of return of more than 20% and another ten year period in which the market lost nearly 1% per year. Bonds, T-Bills or CDs have never lost this much over a 10 year period but they have never returned that much either.

In conclusion, to be a successful investor, first, develop a strategy tailored to your needs. Second, select particular investments that fit your strategy that provides the highest rate of return while minimizing risk. Easier said than done. Hopefully, the information in the following sections will provide you the necessary information to make intelligent investment decisions and guard against many common mistakes.