Dear Carrie: Considering the state of the economy at this time, what is the best place -- for safety and growth -- to invest available cash? -- A Reader
Dear Reader: You're really asking two questions: What's the best place to invest for safety? And what's the best place to invest for growth? Unfortunately, there is no single answer to both these questions. In fact, it's one of the most fundamental facts of life for investors: Growth entails risk; safety means avoiding risk. Growth and safety are fundamentally different investment objectives, and they demand different investment strategies. So instead of looking for one "best place" to invest now, I suggest you identify your investment objectives and your attitude about risk to help you build and manage your portfolio.
Start with the key question for every investor: What are your investment goals and their associated time horizons? Are you investing for long-term goals like retirement or college expenses for your children? Or do you have more near-term objectives like saving up for the down payment on your first home or maybe just putting aside cash for a rainy day? (Regardless of your long-term goals, an emergency fund can represent an important safety net for anyone. I suggest setting aside enough money to cover three to six months' worth of living expense -- perhaps even more if you're nearing retirement or worried that you could lose your job.)
Second, what is your tolerance for risk? Most investors know the connection between risk and reward, and know they need to embrace a certain amount of risk to generate growth over the long term, especially taking inflation into account. Still, it's important to know how much volatility you can handle.
When you've answered these questions, you can begin to think about your overall portfolio and make some intelligent decisions about the kind of investments that are most appropriate. You'll probably have several goals with different horizons, and your challenge will be to invest accordingly.
For example, most investors keep their "rainy day" money in something relatively safe; for example, a money market account or an interest-bearing savings or checking account. Another possibility are certificates of deposit, which are also FDIC-insured and can offer better yields -- but at the cost of tying up your funds for the fixed term.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 31st, 2014 | John Ransom
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 29th, 2014 | John Ransom