In building an investment portfolio, diversification is one of your most important protections. It spreads the risk of an unforeseen event causing a drop in the value of one of your stocks or bonds. The failure of Enron is a good example of a surprise corporate bankruptcy that destroyed the retirement savings of many Enron employees who had their entire retirement funds invested in their company. If they had diversified their investments, they wouldn't have lost all their money. While $25,000 may seem like a lot of money to you, it is a small amount in terms of creating a well-diversified investment portfolio. You certainly don't want to risk losing it, but you do want to achieve a good return on your investment.
Decide your goals for the money. If you will be needing it in the foreseeable future, your investment choices will be very different from those involved in building a long-term portfolio.
Research mutual funds if you expect to spend your $25,000 within the next two years. Look for money market funds if you want your money to be absolutely safe. Intermediate term bond funds are also safe and will have a higher return on your investment. Stock mutual funds will fluctuate with the market and may be at a low value when you need to withdraw your money, so they would not be appropriate.
Research other packaged investment products if you intend to use your money as the start of a long-term investment portfolio that you can add to over the years. Packaged investment products include mutual funds, exchange-traded funds (ETF) and unit investment trusts (UIT). Bonds and high-quality growth stock would be appropriate types of packaged funds.
Consider U.S. Treasury securities. There are several excellent types of interest-bearing securities available on the TreasuryDirect.gov website, and they represent the highest safety rating.
Check the fees involved in any investment you intend to make prior to committing your money. Fees are particularly important when you will be investing a moderate amount of money because they can easily eat up your returns.
- Emphasize conservative investments, particularly if investing is new to you. There is always time to re-allocate your funds into other more promising vehicles, but the first thing you must do is keep the money you have--and that is not easy to do. Professional portfolio managers agonize daily over previously attractive investments that have gone sour. If you know of a reputable stockbroker or certified financial planner, consult with him, but don't invest your money unless you feel completely comfortable with his suggestions.
- Do not be tempted by hot stock tips from well-meaning friends or email stock promotions. It is too easy to lose your entire investment in trading penny stock, options and other rumored ways to make a bundle of money fast. More people lose money in these schemes than make money.
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