The ABCs of Behavioral Biases (S-Z)
Written by Jason Hiley
Written by Andrew Hunt
There’s a lot of information to digest when you first start out investing, and it can be filled with a range of emotions. While we believe investing plays a critical role in the stability of your financial future, there’s a learning curve to understand what works and is comfortable for you.
In this article, we cover the foundational pieces of investing and principles to help you better understand and build your investment portfolio.
When it comes to creating an investment portfolio, you have options. Each different investment option comes with its own risk and reward.
Stocks are small pieces, or shares, of a company that investors buy in the hopes that the business will succeed and the value of their share will increase. This allows the company to raise money to further grow their business while allowing their investors to share in the profit of their success.
Individual stocks can also decrease in value. An option to balance this rise and fall of stocks is to invest in a stock mutual fund, which is a collection of individual stocks. Holding stocks in a variety of companies in different industries and sizes can be less risky than holding stock in a single company. Nonetheless, if you’re relatively young and investing for the long-term, investing in stocks is typically worth the volatility.
Bonds are loans made by an investor to a company or government that are paid back with interest over time. Although bonds pay out interest, their returns are typically lower than that of the stock market over time. But bonds often make up a part of every investor’s portfolio because of their stability and all bonds aren’t the same. Different types yield different interests and risks.
As mentioned above, mutual funds house multiple individual investments into one offering. Investors don’t directly own the underlying assets themselves, but they do share in the ups and downs of the mutual funds’ value. Actively managed mutual funds have fund managers that execute the fund’s strategy, while index mutual funds are built to follow an index or a portion of the stock market.
When you are determining your investment strategy, it’s important to consider your goals. In addition to your goals, factors such as your age and comfort level with risk will weigh in your investment strategy.
Long term vs. Short term
When many people think of investing, they think about saving for retirement. While that is a big, long-term investment goal, there are other goals you may have. For example, maybe you want to invest to save for a down payment on a house. This is more likely a short-term goal (happening within five years or less), and there are investment options for that such as high-yield savings accounts or CDs that are more stable environments than the stock market. For long-term goals, such as retirement, the volatility of the stock market can be weathered more comfortably because the investments will be in the market longer.
Active vs. Passive
How involved do you want to be in your investments? Because of the complexity of investing, many people choose to have an investment manager handle their portfolios without weighing in too much on decisions, while others take a more active role. At Hiley Hunt, we enjoy partnering with you to determine your strategy and build an investment portfolio that works best for you. We always encourage our clients to stay informed about their portfolio, which is why our clients have access to monitor their accounts via an online portal. Additionally, we’re available to guide and inform our clients on their investments and rebalance their portfolio as necessary.
Choosing Your Risk
All investment strategies come with risk. But there’s a range from very low to very high, depending on the type of investment. However, risk and reward are irrevocably linked. Investments with the greatest reward come with the greatest risk. For example, investing stock in a technology startup is very risky, but could reward you with immense value should the company take off. At the other end of the spectrum, a bank CD comes with virtually no risk but pays very little return. Determining your comfort level with risk will help build an appropriate investment portfolio.
If talk of stocks and bonds and high risk versus low risk is overwhelming, an easy way to get started investing for your future is enrolling in your employer’s 401(k) retirement plan or opening an IRA. If your employer offers a contribution matching program, meaning they will match your contributions up to a certain percentage, opt-in for the highest contribution.
Along with helping individuals and their families understand and plan their finances, helping people create their investment portfolios is an exciting and important part of our jobs. If you don’t know where to start, or you’re a seasoned investor looking for a change, contact us today so we can help you build an investment portfolio that is right for you.