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    1. Investing is a great first step toward building wealth for yourself and your family. But because there
      are so many options for how to invest
      and your choices are so tailored to your personal preferences — putting your money to work can be a little

      Here’s a quick investing 101 to help get you started, starting with definitions.

      1. Stocks are a share in a company. These tend to be riskier investments, but also
        typically offer more potential for profit over time.
      2. Bonds are a share of debt issued by a business or the government. These are safer
        investments, typically returning a lower profit than stocks over time.
      3. Cash and cash equivalents are readily available cash and short-term investments like
        certificates of deposit (CDs). These are the safest investments, but typically return little profit over

      These are the most common categories of investments — often referred to as asset classes. There are also
      alternatives like commodities or real estate that require some more advanced knowledge.

      Now that we’ve defined the main types of investments, let’s talk about what you’ll want
      to know as you start building a portfolio (the collection of investments you own).


      These will impact how you invest.

      Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000
      today, could you deal with it being worth $500 for a period of time? That’s possible if you invest
      heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next.
      If you answered yes to being okay losing a great deal of money for a period of time, then you have a high
      risk tolerance.

      Time horizon is the amount of time before you want to use your money. If you’re planning to use the
      money to make a down payment on a home within the next three years, you have a short time horizon and would
      likely have less risk tolerance. If you’re not planning to use the money until you retire in 30 years,
      then you have a long time horizon and can afford to take on more risk.


      Asset allocation and diversification are about putting you in a position to grow your money in a smart

      Asset allocation is the percentage of stocks, bonds or cash you own. If you have a high risk tolerance
      and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be
      able to weather ups and downs and make more money over the long term. On the other hand, if you have a low
      risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose
      money right before you need it.

      Diversification splits your investments among different groupings or sectors in order to reduce risk.
      That includes your asset allocation. But it also includes where you invest within asset classes. For
      instance, you might diversify between stocks in companies located within the United States and stocks in
      companies located in Asia.

      Different sectors of the economy do better at different times. It’s tough to predict which one will
      do well in any given year. So when you diversify and own stocks across different sectors, you are positioned
      to make money on whatever sector is performing well at the time.


      If you’ve done a good job with asset allocation and diversifying, then the balance of your
      portfolio is likely going to get out of whack over time as one sector does better than another. For
      instance, let’s say you wanted 10 percent of your stocks to be companies in Asia. If companies in
      Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll
      want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your
      portfolio that didn’t do as well.

      You might also decide to rebalance your portfolio if your risk tolerance or investment timeline has
      changed — perhaps as you get closer and closer to retirement.

      Either way, it’s a good idea to rebalance your portfolio at least once a year and possibly more
      often. Once you’re ready, there are several ways to invest and different types of accounts that get
      different tax treatment.

      Because there are so many options for how to invest — and your choices are so tailored to your personal preferences — putting your money to work can be a little overwhelming.


      You could invest directly through your retirement plan if you have one at work. Typically work-sponsored
      retirement plans have limited options that usually consist of funds — which are collections of stocks or
      bonds. Some funds are professionally managed. Others are designed to mimic a particular index like the
      S&P 500. Target-date funds are also popular. Those funds automatically rebalance to a less risky
      allocation as you approach the end of the target date (which is typically close to the year you want your
      money — maybe the year you’re planning to retire).

      You could also invest directly through a broker. That could mean opening an online trading account that
      you manage yourself or working with a financial planner or professional.


      Tax-qualified accounts get favorable tax treatment. These include retirement accounts
      like 401(k)s, 403(b)s, IRAs and Roth accounts. Because these accounts get special treatment, there are
      typically limits on who can use them and how much someone can contribute.

      Non-qualified accounts don’t get special tax treatment. This means you’re
      free to invest as much as you would like in them.

      No investment strategy can guarantee a profit or protect against loss. All investing carries some
      risk, including loss of principal invested.

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