In order to select investments that will meet your growth and/or income requirements, it is imperative that you understand what your options are and how those options put your money to work.
The degree of risk varies greatly from investment to investment. For example, stocks have the potential for significant growth, but are given to volatility. Bonds suffer less from volatility making them suitable for generating income but the potential for capital appreciation is limited. Treasury bills, CDs and money market funds are insured, but may fail to keep pace with inflation.
Consider Your Risk Tolerance and Needs
For the most part, since you will have a longer period of time to reach a financial goal if you begin investing at a young age, you can theoretically afford a greater exposure to risk.
For instance, if you're in your twenties and, perhaps, just embarking upon your career, you may be able to accommodate a more aggressive approach to investing for long-term goals. Aggressive investing means selecting investments with the potential to generate superior returns over an extended period. The trade-off is that these investments also tend to expose your capital to greater risk in the short term because their prices are volatile.
If you're in your late 50s or 60s, you'll typically want to be more circumspect about risk exposure given that your portfolio may not have enough time to recover from a market downturn before you need to start drawing on your retirement funds.
Upon retirement, your goal is not only providing continued growth while taking limited investment risk but also ensuring that you have a stream of income that can cover a portion of your living expenses. These are not hard and fast rules. No one approach to selecting investments will work for everyone or will be right for every circumstance. There will be circumstances where a great deal of investment risk may be unwise even for a young investor; if, for example, you're still in school or have significant debt.
Correspondingly, there may be situations when assuming more risk later on in one's working life may make sense so you'll want to fine tune your strategy to your own unique needs and circumstances.
