Like every investor, you want to choose investments that will provide the growth and income you need to meet your financial goals. To do that, it's important to understand what your investment choices are and how different types of investments put your money to work. Risks and potential returns vary greatly from investment to investment. Stocks offer you the potential for growth, but they can be volatile. Bonds generally provide income and lower volatility, but also lower potential for growth. Treasury bills, CDs and money market funds are insured, but may not keep up with inflation.
As a general rule, the younger you are and the more time you have to reach a financial goal, the more investment risk you can afford to take. That means, for example, when you're in your twenties and just starting your career, you may be able to take a more aggressive approach to investing for long-term goals. Aggressive investing means choosing investments that have the potential to provide greater return over an extended period. But these investments also expose you to more risk in the short term because their prices are volatile, which means they might move up and down rather quickly within a short period.
On the other hand, when you're in your late 50s or 60s, you'll probably want to be more cautious about taking on investment risk, since your portfolio may not have a chance to recover from a market downturn before you need to start drawing on your retirement assets. When you retire, 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.
But these are just guidelines. No single approach to choosing investments will work for everyone or will be right for every situation. Even when you're young, there may be circumstances that make it unwise to take a lot of investment risk—if, for example, you're still in school or have significant debt. Or you may simply be uncomfortable with that approach. Similarly, there may be situations when it makes sense to take more risk in your portfolio later in your working life. So you'll want to tailor your strategy to your own unique needs and circumstances.
What does make sense for all investors is concentrating on investments that, however different they are from each other, share these important characteristics: