If you’re thinking about how to pay for college, buy a house or save for retirement, saving and investing for those goals now should be one of your top priorities. Here are five basics to help you reach your long-term goals.
Before you invest, it's important to have your goals and time frame in mind. Ask yourself how much risk are you willing to take. After you know these things, you can decide where to invest your money.
Most investments fall into one of five asset classes — ranging from “conservative” to “risky.” CDs and money market accounts are on the more conservative end and equities (stocks) are on the riskier end. The more risk you’re willing to take on, the higher the potential returns.
If you’re saving for something 20 years down the road, it may make sense to take on more risk than someone saving for something that’s only a year away.
Try our Asset Allocation Evaluator to find your risk tolerance.
Common Asset Classes
Equities – individual stocks and funds investing in stocks
Fixed income – bonds and bond funds
Cash equivalents – money market funds, T-bills, short-term CDs, etc.
Guaranteed – fixed rate products backed by claims paying ability of issuing insurer
Real estate – your home or investment property plus shares of funds that invest in commercial
When you keep your savings in similar investments, you could be putting your money at too much risk or missing out on potential returns. You're usually better off diversifying, or spreading your savings out.
When you diversify, you invest your investment dollars across all asset classes. Even within each asset class, there are opportunities for added diversification — for example, there are multiple sub-sections within equities.
You may be tempted to try "market timing" — the practice of moving your money in and out of equities to try and capture the performance highs and avoid the lows. It’s extremely risky since you have to be right twice — when you sell out of the market and again when you buy back in. Even the most experienced investors find it challenging.
Stock prices go through short-term ups and downs. If you sell your stocks during a down period, you may lose the opportunity to share in gains when prices go back up again. Keep in mind that historically, the stock market has recovered from broad slumps. Of course, past performance is no guarantee of future results.
Don’t let short-term volatility in equities or any other asset class distract you from staying on the path you set for your long-term goals.
When you contribute on a regular basis to a savings and investment account — whether it’s your workplace savings plan or one you have opened on your own — you're taking part in dollar-cost averaging.
Dollar-cost averaging is the practice of buying a set dollar amount at regular intervals, regardless of the ups and downs of the markets. When the investment’s price declines, you get more shares with your contribution, which can lower your average cost per share. The lower your cost to invest, the greater your potential rate of return.
|Contribution amount||Investment price (per share)||Shares purchased|
Average cost = $12.50 ($300 divided by 24 shares)
Bear in mind that dollar-cost averaging cannot guarantee you a profit or protect you against the risk of loss.
Take a fresh look at your portfolio at least once a year to make sure it still reflects your original asset allocation. Over time, market fluctuations can throw your asset allocation out of balance. When this happens, you can rebalance your portfolio to help keep your investments aligned with your strategy.
It also makes sense to rethink your asset allocation whenever your life changes, for example if you get a raise, get married, have a baby, or go through a divorce. When things change, you might end up deciding to take less risk with your investments or choose to take on more risk.
When you check on your asset allocation, make sure your portfolio has also stayed diversified enough to maintain the risk level you’re comfortable with.
There are inherent risks in investing in securities Products may be subject to market and other risk factors. It is possible to lose money by investing in securities.
Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Dollar-cost averaging does not assure a profit or protect against a loss in declining markets. Because such a strategy involves periodic investment, you should consider your financial ability and willingness to continue purchases through periods of low price levels.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.