It’s important not to put all your eggs in one basket when it is time to invest. By doing this, you expose yourself to the potential for significant losses when a single investment performs poorly. The best strategy is to diversify across the different types of assets, including stocks (representing shares in individual companies), bonds, and cash. This will reduce the risk of your investment returns and let you gain more long-term growth.
There are a variety of types of funds, including mutual funds, exchange-traded funds and unit trusts (also known as open-ended investment companies or OEICs). They pool funds from many investors to purchase bonds, stocks as well as other assets, and then share in the profits or losses.
Each fund type has its own characteristics and comes with its own risks. Money market funds, for example, invest in short-term securities issued by federal, state, and local governments or U.S. corporations, and are typically low-risk. Bond funds tend to have lower yields, but they have historically been more stable than stocks and offer steady income. Growth funds search for stocks that don’t pay a regular dividend but have the potential to grow in value and generate above-average financial returns. Index funds track a specific index of stocks, such as the Standard and Poor’s 500, sector funds are focused on certain industries.
If you decide to invest via an online broker, robo-advisor or other service, it’s essential to know the different types of investments available and the conditions maximizing value at risk they apply to. A major factor to consider is the cost, since fees and charges can eat off your investment’s return over time. The top brokers on the internet and robo-advisors are transparent about their fees and minimums, and provide educational tools to help you make educated choices.
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