the money over to a professional investor who’ll spread it among a few dozen stocks, pads your investment from the ups and downs any company faces.
Another way to minimize risk is in long-term investing, especially when you remember that stocks have averaged an annual return above 10% over time. That’s a poignant reminder that any nose- dive in the market can be IL canceled out with patience. If you had the misfortune of investing $1.000 in the stock market on October 1,1987, you would have seen that sum dwindle to $699 by the morning of the 20th. However, a year later, on October 1, 1988, it would have recovered to $845, not including dividends you would have received. At the end of 1990, you’d have had $ 1,026, and $ 1,449 at the end of 1993. By the end of last year, that stake would be worth $2,302.
There’s another twist on the issue of risk that you should keep in mind. While longer term investing cushions your portfolio against risk, the shorter your time horizon, the less risk you can actually afford to take. If you’re 60 and about to retire, you simply can’t afford to bet on the erratic small company stocks. Instead, you’ll best aim to preserve your capital by taking the least amount of risk possible.
CHOOSING FROM THE ENDLESS VARIETY
Once you know yourself as an investor, how do you know which investments are appropriate for you? Think of investing as cooking, and you will soon realize a mutual fund company, says Fidelity or Vanguard, is the investing equivalent of a food court in your local mall offering a type of mutual fund for every taste.
Treasury bonds are among the most risk-free investments. Issued and backed by the U.S. government, they’re practically fail-safe. If held until maturity, they’ll pay you the principal you originally invested along with semi-annual interest payments that you can depend on. That makes Treasuries the best bet when preserving capital, or making sure the money you invested doesn’t decrease. At the other end of the risk scale are individual stocks. Betting on one company ties you to the fortunes of its shares, good or bad. We’d recommend that Squeezers first devote more attention to growing their wealth with mutual funds, then perhaps a couple stocks rather than preserving it with bonds at this stage.
Within the world of mutual funds, there’s a spectrum of risk you should be aware of. We’ve compiled broad definitions of some of the categories of funds you’re likely to encounter, and added a selection of top picks in each category chosen by Morningstar, a Chicago-based company that tracks mutual funds.
Growth funds invest in companies that are expected to grow profits or earnings faster that the economy as a whole. Entertainment and technology companies, which are in rapidly growing sectors, might be included in this kind of fund. Typically, growth funds tend to be a bit more volatile than the overall market, but they also carry the potential for greater gains. According