Good Morning Green Panda Readers.  I hope you are all enjoying the hot summer weather. Today we are discussing risky investments for twenty-something investors.  If we are lucky enough to start saving for retirement in our early twenties we can afford to take some risk, as long as we are investing for the long term.  It is very important to understand the time horizon, investment objective, as well as potential risk of an investment before we make an investment purchase.

Investing for Dummies

If you are an investment dummy or an investment beginner you don’t have to do extensive research before you make an investment purchase.  Investors should have a basic knowledge  of investment products and general investment principals, but we should definitely leave the details up to our Financial Advisor.

As a general rule the longer time horizon we have, the more risk we can take.  If we are investing for 25 years and after the first 5 or 10 years our investment value fluctuates or drops in value it’s ok because we still have 15 to 20 years until we reach our intended time horizon.

Another basic investing rule is to make sure that the investment product objective is in line with our personal investment objective.  If the investments objective is to pay out a fixed monthly income while securing our capital and our personal investment objective is to have growth over the long term, this may not be the ideal investment for us.

After we have determined our investment time horizon and our investment objective our Financial Advisor will usually suggest 2 or 3 different investment options.  Although past performance is definitely not an indication of future performance, it is important to be comfortable with the daily fluctuations in value of the investment.  The more risk we take on our investments the higher potential rate of return we can earn on our investments.  However, risky investments are never guaranteed and therefore we can gain big, but we could also lose big.  It is important that we are willing to take this risk.

Once we have determined our time horizon and investment objective, and once we are comfortable with the investment risk we can start selecting specific investments for our portfolio.

The Best Investments for 2011

There is really not one universal investment that is best for every investor. The best investment for you may not be the best investment for me, and vice versa.  I suggest that investors look at several different investment options based on their time horizon, investment objective, and risk tolerance.

Mutual Funds are a very cost efficient investment that allows investors access to a variety of different investments.  A Mutual Fund is a pooled investment that may invest in various bonds, stocks, fixed income, and foreign equities.  Investors can purchase Mutual Funds through an Investment Broker or a Financial Institution.  Mutual Funds trade only once a day when the market closes at 4pm EST.

Exchange Traded Funds share some similar qualities to both Stocks as well as Mutual Funds.  Exchange Traded Funds trade on a daily basis which is similar to a Stock, and they usually follow an index such as a Mutual Fund.  Also similar to a Mutual Fund, Exchange Traded Funds are a pooled investment which can hold different investments inside them. However, Exchange Traded Funds can be traded throughout the business day until the market closes, which is similar to a Stock.

Venture Capital Investments or Small Cap Funds are invested in small companies or start up firms who are trying to grow their business.  Investing in Small Cap or Venture Capital Funds is considered to be very risky because there is no guarantee that company will make a profit. However, investments in Venture Capital or Small Cap Funds can also be very profitable if the business is profitable.

 

Here is the other post in our Investing Our Money in Our Twenties series:

Traditional Savings Accounts Are Boring!

Photo by Mika