Investor Education
Savings vs. Investing
Saving and investing may seem similar at first glance, but they are two very different ways of managing your money.
Saving is keeping money safely in a bank or money market account to meet short-term needs such as known, upcoming expenses or emergencies. When you save your money in these accounts, you typically earn a low, fixed rate of return and can easily withdraw funds as you need them.
Investing, on the other hand, involves taking a risk with a portion of your savings by purchasing investments, such as stocks, bonds or mutual funds, in hopes of gaining higher long-term returns. While investments are not guaranteed to increase in value, the returns from investments historically have been higher than bank savings and have outpaced inflation.
Systematic Investing
Plan for Your Future with Systematic Investing
Time can be one of your best allies when you are investing. You have a better chance of growing your wealth to meet your life goals, as well as preparing for inevitable costs of living – saving for college tuition, buying a house, and other big purchases – when you start early and invest often.
To increase your chances of meeting your objectives in a timely manner, you can invest systematically. With systematic investing, you can earmark a portion of your resources to be withdrawn from your savings account and deposited into your investment portfolio. Making investments at a set amount within a designated fund on a routine basis is called dollar-cost averaging. With dollar-cost averaging you may be able to purchase a larger number of shares at a lower price.
In addition, your investments can grow exponentially when you factor in the benefit of compounding. If you take your capital gains or the income you receive from dividend-paying investments and reinvest it, you can increase the value of the principle of your investment and earn money on your earnings. If you continually reinvest your earnings, the number of shares you own will continue to grow. Systematic investing does not assure a profit nor protect against a loss in a declining market. Since such a plan involves continuous investment in securities regardless of fluctuating prices, investors should consider their financial ability to continue purchases through periods of low price levels.
Asset Allocation and Diversification
Asset allocation and diversification follow the age-old principles of “hedging your bets” and “not putting all your eggs in one basket.”
Asset allocation is the process of spreading your investment dollars across multiple asset classes — such as stocks, bonds, cash and tangibles (for example, gold and real estate) – based on your risk tolerance.
Diversification is a portfolio strategy designed to balance your portfolio and guard against market volatility by dividing your investments among a broad mix of different investment types — investment styles (growth, value or blend) and equity size (small-, mid- and large-cap). By diversifying your portfolio, you may be able to reduce exposure to greater investment risk.
Benefits of Asset Allocation and Diversification include these:
- Reduction of portfolio risk
- Different mixes to meet different objectives and risk tolerances
When you work with your financial advisor, he/she can help you determine the right diversification and asset allocation as well as the right investment managers within each asset class, to meet your investment objectives based on your risk tolerance and financial situation. Diversification does not eliminate the risk of experiencing investment losses.
