Rattled by rising prices? Spooked by recent corporate failures and stock market upheaval? Stressed out by the mortgage mess?
No matter how immersed you are in your nursing job, surely you’ve noticed the economy has been on shaky ground. Even if you feel secure in your nursing job and have no trouble paying your bills, you may be wondering if you could—or should—be doing more to safeguard your financial health and well-being.
Perhaps you’re afraid to invest, or feel you don’t know enough about fiscal matters to invest wisely. If so, you’ve turned to the right page. It’s never too late to learn.
Assessing your risk tolerance
When it comes to investing, you need to consider many factors. Chief among these is your risk tolerance. Risk is much easier to take in a good market; in a down market, such as the current one, it’s a very difficult pill to swallow. The spectrum of investments is like a pyramid with many levels; as you climb, each level gets riskier.
Knowing your ability to handle risk is crucial in the current market. The trick to investing wisely is to know how comfortable you are with risk taking—and never invest above this level. Generally speaking, the safer the investment, the less money you’ll earn from it, especially when interest rates fall and investment performance goes down. I’ll start at the bottom of the pyramid by discussing the safest investments, and then work up to greater risk levels.
Level 1: The safest investments
Money market accounts are by far the safest type of investment (not taking the inflation factor into account). Other safe bets include U.S. government securities, such as Treasury (T) bills, notes, and bonds. T-bills are sold at a discount from their face value and create a positive yield to maturity (1 year or less). T-notes and T-bonds pay interest every 6 months. The main difference between them is maturity; T-notes come in maturities of 2, 5, and 10 years, whereas T-bonds have maturities ranging from 10 to 30 years. Other relatively safe investments include U.S. savings bonds, bank certificates of deposit, and savings and checking accounts.
Money market instruments
Money-market funds are low-risk, relatively short-term securities. Money-market mutual funds are based on portfolios of these same securities. Because they’re made up of low-risk securities and the funds are diversified, they’re safe investments for money an investor expects to need within a short time (less than 6 months).
Level 2: Corporate bond funds and “munis”
An investor who buys corporate bonds or shares in a mutual fund that buys corporate bonds essentially is lending money to that corporation. These loans are riskier than loans to the federal government (such as T-bills). But for investment-grade bonds and funds (those rated AAA/Aaa to BBB/Baa by Standard and Poor or Moody’s), the risk of the corporation going bankrupt is still low. Such investments work well as a portion of
a person’s investment portfolio.
Municipal bonds (munis) and
municipal-bond mutual funds are similar to high-quality corporate bonds, but with an important difference: The issuer is a federal, state, or city government entity, so the interest is tax-free in many cases. Municipal-bond insurers insure some high-quality munis against default. Investing in munis makes sense mainly for people in high tax brackets, who have the most to gain from the tax exemption. They’re not suitable for individual retirement accounts, which are taxed on a deferred basis.
Level 3: Stocks
Stocks are the capital a corporation raises by issuing shares that entitle holders to an ownership interest, or equity. When you buy a company’s stock, you’re paying for a small percentage of everything the company owns—buildings, chairs, computers, and the like.
Stocks are relatively risky investments because companies are subject to various internal and external changes (such as supply/demand changes, cash-flow changes, and market factors). But because of the higher risk potential, stocks have a higher reward potential.
Growth stocks and growth-stock mutual funds are shares in companies that are industry leaders and whose growth rates may exceed 10% in a good year. These companies normally pay low dividends—cash payments declared and paid quarterly by corporations to stockholders. Growth-stock companies offer the opportunity to profit from rising stock prices and produce excellent returns well above the inflationary rate.
Large- and medium-capitalization stocks and mutual funds
Large-capitalization (“large-cap”) companies are those in which a great deal of money has been invested. These companies have a high market value (generally above $5 billion) and a larger market share, allowing them to influence their market. (Market value is calculated by multiplying the number of common stock shares owned by stockholders by the current price per share. For example, a company with 100 million shares outstanding at $60 per share has a market value of $6 billion.)
Stocks in companies with market capitalizations ranging from $1 to $5 billion are considered “mid-cap.” These medium-size companies generally have high growth rates in revenues and earnings. They tend to perform well when the markets are recovering from a downturn.
Small-capitalization stocks and mutual funds
Small-capitalization (“small-cap”) companies are those with a maximum capitalization of $1 billion. Generally, they have short track records and represent high risk—but also have a relatively high return potential. Overall, small-cap companies perform well, and every portfolio should have a representative portion in this sector. When the stock market is in recovery mode, the small-cap sector usually performs well during initial recovery phases because it has so much upside potential. Small-cap companies can be good long-term investments too.
Don’t go it alone
Whether you’re just getting your foot in the door or are an experienced investor, you can protect and grow your assets through prudent investment selection and asset allocation. Your financial advisor can help you assess your risk tolerance and get the investment results you desire. O
Cindy Diccianni is a Certified Senior Advisor, Certified Long Term Consultant, Registered Investment Advisor. She recently launched her own company, Argus Financial Group in East Norriton, Pennsylvania. You can contact her at cindy@The Argus FinancialGroup.com.