An investor is one who invests his hard-earned savings in such a way that he is able to get a good return on this investment. One invests with an objective in mind. It could be to save money to buy a house or a new car. It could also be to save for retired life.
An investor has to create a portfolio. A portfolio is a set of investments made in various classes of assets. Some of the different asset classes when it comes to investments are:
- Bonds: These are debt instruments. They may be government bonds or corporate bonds. This is an investment you make by buying a bond, for you are given interest. The interest given is generally conservative in nature. Bonds are generally less risky. Government bonds have no risks and your interest is assured.
- Savings deposit: These are deposits made in banks, which earn interest. This is a less risky investment, but the returns are less.
- Stocks: These are shares owned by companies and traded on the stock market. These grow in value depending on the performance of the company and the industry. These can give very good returns, but there is an element of risk as you may lose your invested money if the company under-performs or the stock market crashes.
- Mutual funds: These are funds that are managed by professionals, who take money from investors and invest it in stocks. The professionals manage the funds effectively by selling off bad stocks and investing in stocks with good potential. Even though this is risky, the risk is lesser than stocks as professionals manage the funds.
- Retirement plans: Savings for retirement can be done by taking part in a 401(K) retirement plan or an individual retirement account. Money contributed every month earns interest and a fund is created for use post-retirement.
- Physical assets: This includes real estate and land. They generally take a long time to generate a return on investments and are suitable for a very long-term.
Risk and young investors
As discussed above, every asset class or investment avenue has an element of risk. The least risk is in government bonds because the return on investment is assured by the government. The riskiest investment is in stocks. This is because the stock market is volatile and one bad news can wipe out your savings in an instant. This gives the highest returns but is also extremely risky.
Let us now try to understand investments from the point of view of young investors. These are people who are aged less than 30 years. They have a long-term outlook and they want to invest in the future. They wouldn’t mind waiting for a long time for their investments to yield return. So, they would not mind ups and downs in their savings over a short term. Their appetite for risk is thus high.
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For young investors, investing in stocks and mutual funds, along with a retirement fund makes a lot of sense.
They can earn a higher rate of interest, which helps them to beat inflation. Once they cross 40, they can reduce their investments in stocks and invest more in safer options like bonds.
A young investor not afraid of risk can thus choose a portfolio, which would consist of:
- Stocks and mutual funds
Apart from this every month, they can contribute to a retirement account.
How much to invest in stocks? There is a formula: (100 – Age). For someone who is 30, 100-30=70, which means they can invest 70% in stocks and 30% in bonds.
Young investors who are not scared of risk can invest between 70 – 80% of their monthly savings in stocks and the remaining in bonds.