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(originally published September 2010)
Between monthly bills and unexpected expenses, it can sometimes be difficult to think beyond your immediate financial needs. However, it’s important to make sure you are planning now for your future so you are financially prepared down the road. Investing can be a great way to build wealth as long as you understand the basics, make informed decisions and do your research.
Simply put, investing is putting money into a product with the expectation that it will grow over time. However, that doesn’t mean that your money will always grow. In fact, when it comes to investing, you are never guaranteed to make money. There are several types of products you can invest in, each with their own level of risk. For example, purchasing stocks carries more risk than a bond. This means that you stand to gain or lose higher amounts of money with stocks than with bonds.
With so many different products, knowing where to invest can be overwhelming. Keep in mind that not every investment is right for you and you want to invest in products that are suitable, or appropriate, for your needs. When determining where you should invest, consider the following questions:
- Why are you investing? Are you planning ahead for retirement? Funding your child’s college education? Or saving for a down payment on a house? Your reason for investing will influence the type of products you want to invest in.
- How long do you want your money to be invested? Are your goals short-term or long-term? Some investment products, like Certificates of Deposit (CDs), are designed for short-term investing whereas others, like annuities, are designed for long-term investing. Help your money work for you by making sure the product is suitable to your timeframe.
- What is your risk tolerance level? Again, every investment product carries some level of risk, but how much risk are you willing to take? Your risk tolerance level is essentially how comfortable you are with big gains and losses versus smaller gains and losses. For example, if you have a low risk tolerance level, meaning you don’t feel comfortable taking big risks, the sometimes volatile stock market may not be suitable for you.
Keep in mind that your goals, investing timeframe and risk tolerance level may change. Reevaluate these questions on a regular basis and adjust your investment strategy accordingly.
Some people turn to a financial services professional for help with investing. Before working with a financial planner, investment adviser or broker-dealer, make sure the person is licensed and registered by calling my office’s Securities Division at 1-800-223-8791 or using the searchable databases online at www.IndianaInvestmentWatch.com.
You should also understand the difference between the two different standards of care in the financial services industry: suitability requirement and fiduciary duty. With a suitability requirement, financial services professionals must offer products that are appropriate to their client's needs, goals and risk tolerance level. However, they are not obligated to act within the best interest of their client, meaning they can push investments that secure a higher commission for them but may not provide the highest returns for the client.
With a fiduciary duty, financial services professionals must offer products that are in the best interest of the client, meaning they put the needs of the client before the needs of their employer and themselves. Fiduciary duty is the highest standard of care in the industry. For a breakdown of which financial professionals fall into each category, visit the “What’s What in the Financial Services Industry” section on www.IndianaInvestmentWatch.com.
For additional investing tips and tools, visit www.IndianaInvestmentWatch.com.