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How Much Stock Risk Should You Take?
Choose your risk level to invest in. Decide on how much risk you are willing to
take, and on how much risk you are comfortable with. The longer your time
horizon, the more risk you should take. The more risk you take, the higher your
return should be. When you take risk, make sure you try to diversify within your
risk level. For example, if you are investing in medium risk, large cap
investments (like Fortune 500 companies or S&P 500 companies), either buy
several stocks or buy a mutual fund that invests in a broad array of these
companies.
Determine Your Goals and Needs. Depending on what your goals are, you will
utilize different investment tools. Here are the first questions to answer. If
you are saving for one or more of these goals, then prioritize them and allocate
your investment money among the various investments.
Are You investing for the short or medium-term? If so, you’ll want to open a
traditional brokerage account, or maybe even use your local bank. If you are
investing for the short-term (less than a year), then you are probably best off
if you purchase a CD at your local bank or park your money in a money market
savings account. If you are investing for the medium-term or long-term, you’ll
want to open a brokerage account. Opening a brokerage account is as easy as
filling out and mailing in an online form, and can be done by almost anyone.
Are You investing money that you will want access to before retirement? If
so, do not invest the money in a tax-deferred account, but rather follow the
advice from the previous goal.
Are You Saving for retirement? If so, you’ll want to utilize as many
tax-deferred investments as possible, including any 401K, 403B, IRA or Roth IRA
that you qualify for. 401K and 403B plans are only available through your
employer. These are the most beneficial tax-deferred plans available. If you are
eligible for these plans you should start investing in them immediately, and
contribute as much as you can each paycheck and each year. The difference
between an IRA and a Roth IRA is that an IRA is tax deductible the year that you
create it. Also, if you already participate in a 401K or 403B plan, you are
usually unable to contribute to a traditional IRA. In a traditional IRA your
money grows at a tax-deferred rate but when you sell it you’ll have to pay taxes
on the full amount. On the other hand, with a Roth IRA you are taxed on your
contribution the year you make the deposit, but you will never have to pay taxes
on the money when you take money out. (Click here for a good example of the
differences between the two)
Are You saving for children’s college? If this is one of your specific goals,
then you can invest money in a 529 plan (either a prepaid tuition plan or a
savings plan) or a Coverdell IRA (formerly know as Educational IRA). Also, see
collegesavings.org to find out what plans your state offers.
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