How to Decide Where to Invest

Deciding where to invest is the most important decision that must be made to profit from the stock markets. Often, deciding where to invest is based on how much time the investor has before the invested dollars will be used for their particular purpose and what kind of risk is acceptable for each investment.

Short Term Investments

Short term money of 5 to 10 years should be dedicated to safer investments, such as certificates of deposit or corporate bonds. Money that will be used within a short timeframe should never be exposed to the dangers of the stock market, regardless of how well the markets have performed over the years. Even with an average return of 10.5% in the general stock market, that is an average and is not a guarantee of future returns, nor a guarantee that the stock market will not drop in value.

Corporate bonds are relatively safe and easy to buy through mutual funds that cater only to corporate debt. Municipality debt and other investments should be considered heavily, as the rates of return are roughly the same as corporate debt after consideration for their taxfree status. Municipal debt mutual funds also exist and are a great way to own debt in various parts of the country and the world to limit the risk of loss. Municipal debt is safer than corporate debt as very few cities fail financially compared to the number of corporations.

Mid Term Investing

For funds of 10-20 years, it would be advisable to consider stock holdings though no more than 20-30% of a portfolio. With 10 to 20 years, there is enough time to make it through the ups and downs of the stock market with just 30% of the investors stock portfolio. By balancing the amount invested to just 30% of the total portfolio, a bear market plunge would cost just 6% against the total portfolio.

The other 70% of the portfolio should be invested in short term investments like corporate debt and certificates of deposit or annuities. The important thing to remember is that investors can always make up for losses early in their investment career, but there is never time to make up a loss right before the money is needed for use.

Long Term Investing

Long term investments can be particularly risky. A 25 year old saving for retirement can easily afford a 90% stock portfolio with a few bond funds mixed in between. With more time, more money should be dedicated to riskier and more rewarding investments. Stocks are a perfect balance of both risk and reward. It is unlikely that the stock market will lose 100% value, but entirely likely that it could double in the same time period. A hefty weighting of stock will give above average returns and grow wealth as quick as possible until the risk should be tuned down. Target date funds are a great way to look long term, as they have a professional rebalance the portfolio as the investor nears retirement or the date of use for the invested money.