14 Investing Questions You Should Be Able to Answer
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Between all the jargon, numbers and analysis that typically go hand in hand with investing, it’s no surprise that many Americans end up confused. For example, a 2015 TIAA-CREF survey found that more than half of investors zero in on short-term performance when evaluating an investment’s returns. (Advisors recommend taking a broader look at long-term performance.) And 53 percent believe that higher risk guarantees higher returns. (Spoiler alert: Nope.) Acting on misconceptions like these can wreak havoc on your portfolio.

So to help clear up the confusion, we’ve got answers to some of the most important investing questions you need to know—from how to pick a stock to what to do when the market suddenly drops.

1. Why should I invest in stocks?

They provide an opportunity to grow your money over time. While there are risks—stocks can go up and down, and companies can go bankrupt—there’s also the opportunity for larger returns than you might get by putting all your money in a savings account (or under your mattress). Investing can also provide income outside of your paycheck through dividends.

2. How do I know what kinds of stocks to invest in?

It depends on what you need your investments to do for you, and what holes you need to fill in your portfolio. If you’re looking for rapid growth and can handle a lot of risk, you might look to new tech companies, for example. If you want a safer bet, blue-chip stocks might be for you. To diversify your portfolio, it’s wise to invest in a range of different stocks and sectors.

When deciding whether to buy shares of a company, you may want to consider its earnings history and projections and the current stock price relative to its 52-week high and low. You can also read analysts’ reports and ratings.

Of course, investing in individual stocks isn’t the only option. You can invest in baskets of stocks through index, exchange-traded or mutual funds.

3. What’s the benefit of investing in funds over individual stocks and bonds?

If you invest all your money in one stock, and it goes down, you can lose a lot of money (assuming it doesn’t go back up before you need to sell). But if you invest in a mutual fund or ETF, you can own hundreds of different stocks and bonds, allowing you broad diversification with just one investment.

4. Why is it important to invest in both stocks and bonds?

Owning both stocks and bonds is how many investors diversify their portfolios, as stocks tend to be a riskier investment, while bonds are generally considered safer. For that reason, as you get older—and closer to retirement age—experts recommend shifting your asset allocation toward owning more bonds.

One rule of thumb to simplify asset allocation is the Rule of 100, in which you subtract your age from 100 in order to figure out what percentage of your portfolio should be stocks. For example, a 30 year old would aim for 70 percent stocks, 30 percent bonds, while a 60 year old’s portfolio would be made up of 40 percent stocks and 60 percent bonds.

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5. Why are bonds considered safer than stocks?

Bonds are essentially loans you give an issuer (typically a company or a government agency) with the expectation that you’ll get paid back, with interest, over a specific timeframe. While there’s always the risk that the issuer will encounter financial troubles and be unable to make good on the plan, this isn’t a common occurrence—making bonds a relatively safe investment.

That’s compared to stocks, which are investments in a public company. Your shares go up and down with the company’s value, which can be affected by a wide array of (often unpredictable) factors, including management decisions, government regulations and macroeconomic events.

6. Why do stock prices go up and down so much?

Ups and downs are completely normal. A lot of factors can influence fluctuations—from movements in oil prices or unemployment numbers to the presidential election. If your plan is to invest for the long term, you are bound to experience some day-to-day volatility along the way. But, historically, the stock market has recovered from downturns, and continued to climb, over time.

October 4, 2016

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