12 things everyone should know before investing
Sebastiaan ter Burg/Flickr
You invest differently depending on how much time you have
Your time horizon is the number of years between now and when you’ll need to use the money you’re investing. It should become evident after you establish your goal.
Once you have a time horizon established, you’ll have a better idea of where to put your money and will be able to form a strategy. Generally, the more time you have until you need the money, the more risk you can take. That way, if something goes wrong, you have time to recoup those losses.
“In general, there are three types of asset classes in investing: cash, bonds, and equities [stocks],” White explains. “And each of these three types have their own ranges of rates of return that you can more or less expect over a period of time.”
Understanding these rates of return will help you determine how to invest.
Note that no matter what your timeframe, you’ll want to maintain a properly diversified portfolio of investments — more on that in a moment. But the following time frames may help give you an idea of where you might want to put more of your money:
If you need your money in 0 to 2 years:
The first asset class White mentions, cash, has several different sub-categories: savings accounts, CDs, and money-market accounts. Cash typically has a low return rate, but is stable. Therefore, this is your best option if you need your money in the short term, White says.
If you need your money in 2 to 5 years:
“Bonds in general, over a period of time, will generate anywhere from 3 to as high as 8%,” White explains. “If you have an objective to reach in two to five years, bonds are most appropriate, because they’re more stable than stocks, yet they’ll generate a higher income than cash. They’ll fluctuate, but not to the degree of stocks in general.”
If you need your money in 5 or more years:
For any goal that’s over five years out, you can weight your portfolio more toward stocks, as they’re the most likely to eventually outpace inflation and get you the most return.
“You should expect fluctuations,” White notes. “Stocks have a huge range of returns, going from negative 38% as we saw in 2008, to even 30-plus% coming out in 2009 and 2010. But over a longer period of time, stocks have been reliably generating about 8% return over the course of 70 or 80 years.”