You don’t need to have young children to be aware that we’ve reached that back-to-school time of year. Whether you’re shopping for school supplies or not, you may want to take a cue from this season to think about getting a little more education yourself — specifically, investment education.
Many people find the language of investing to be confusing, but with a little effort, you can learn important concepts and principles. And the more you know about investing, the better off you’ll be. In the investment world, as in other areas of life, knowledge is power.
So take just a few minutes to read more on these basic investment concepts:
• Growth: You purchase some types of investments with the hope that their value will rise over time. Of course, over the short term, the prices of growth-oriented investments can and will fluctuate, sometimes substantially, and the preservation of your principal is not guaranteed.
• Income: When you invest in income-oriented or fixed-income vehicles, you receive income in the form of interest payments. The market value of fixed-income investments also can fluctuate, but if you hold them until maturity, you generally can expect to receive the original principal value.
• Investment risk: When most people talk about investment risk, they are usually referring to the possibility of losing money, and that is indeed an ever-present risk. But all investments carry some type of risk. When you invest in fixed-income investments, for example, you may incur interest-rate risk — the risk that the value of your investment will drop if interest rates rise. Or you may encounter purchasing-power risk — the risk that your rate of return may not keep up with inflation.
• Risk tolerance: Generally speaking, your risk tolerance refers to what type of investor you are. If you’re an aggressive investor, you may be willing to accept greater risk in exchange for potentially higher returns, whereas if you’re a conservative investor, you’ll take lower returns if you can receive greater preservation of principal.
• Time horizon: Your investment strategy will be partially based on your time horizon — the number of years in which you plan to invest. Your time horizon likely will stretch into your retirement years.
• Diversification: Diversification is an important factor in investment success. By spreading your investment dollars among an array of investment vehicles, you can help reduce the impact of volatility on your portfolio. However, diversification by itself can’t guarantee a profit or protect against loss.
While far from exhaustive, this list of investment terms can help you gain a clearer understanding of the “nuts and bolts” of investing and perhaps encourage you to further your investment education.
Cardella is an financial advisor for Edward Jones, which provided this article.