If you’re new to investing, there are a few important things to know about the factors that will affect your portfolio.
Investing is complicated, and it may feel challenging to find the time to understand how it works when you’re focusing on your professional responsibilities. But as you start investing in stocks, bonds or any other asset, it’s important to have a grasp on the different investment principles and concepts that may affect how your money potentially grows—or doesn’t.
Once you understand the vocabulary of investing, you’re ready to learn more about how certain concepts affect your portfolio.
Generally, the potential for greater returns on an investment can mean taking on more risk.
1. Risk and return
Every investment opportunity balances two factors:
Risk: The likelihood that an investment will lose money
Return: The earnings you could potentially get back on your investment.
Generally, the potential for greater returns on an investment can mean taking on more risk. As an investor, you will likely have to take on some level of risk or uncertainty to make a return. The key is to create a portfolio that balances risks and potential returns. Different types of investments come with different levels of risk and return.
Additionally, it’s important to carefully evaluate investment opportunities. As you earn more money, you’re likely to hear about “once-in-a-lifetime” opportunities from people who want you to invest. A professional Financial Advisor can help you evaluate whether these opportunities should be part of your overall investing plan. If you choose to manage your own investments, it’s important to carefully research your investment opportunities.
2. Diversification and asset allocation
Diversification means spreading your investments across assets that offer different levels of potential risk and returns. The rationale is that over time, when one type of investment performs poorly, others may be performing well. For example, stocks can provide higher returns to investors, but they can be more “volatile” than bonds, meaning that their prices can fluctuate from day to day, based on what’s happening with the company and in the stock market. A diversified portfolio helps manage this risk by including lower-risk securities, like bonds, bonds) as well as higher-risk securities like stocks.
The way you divide up your portfolio across these different types of investments is known as “asset allocation.” For example, one approach to building an investment portfolio is a mix of 60% stocks and 40% bonds. Your preferred allocation should depend on your unique financial goals and tolerance for risk.
3. Rebalancing
Over time, one part of your portfolio may grow more than others. For example, you may have stocks that perform well and increase in value, leaving you “overinvested” in those stocks according to your investment plan. On the other hand, if they perform poorly and lose value, you may end up “underinvested.” So, periodically, your investments may need to be “rebalanced,” or re-allocated so that your money reflects the overall balance that’s best for you. However, it’s important to be aware of any tax consequences involved in buying or selling assets as you rebalance.
When you evaluate potential investments like stocks, bonds or funds, look for those that have historically delivered returns equal to or greater than inflation.
4. Inflation
Life typically gets more expensive each year. Whether you’re shopping for groceries, a new car or tennis gear, it’s likely you’ll see an increase in prices over time. This is known as inflation: the cost increase for goods and services.
What does this mean for you as an investor? When you evaluate potential investments like stocks, bonds or funds, you may want to consider those that have historically delivered returns equal to or greater than inflation. For example, if an investment’s expected return is 4% but inflation is 5%, the investment may lose value, even if it shows a gain. (Keep in mind that past performance doesn’t guarantee future results, but it can give you an idea of the investment’s track record.)
5. Dollar-cost averaging and lump-sum investing
When you receive a large sum of money all at once, your first move is to decide how much you want to save and how much you want to invest. Once you know how much you want to invest, you may wonder whether you should invest the whole amount at once or spread out your investments over time. Both approaches have potential benefits and downsides.
With “dollar-cost averaging,” you spread your investment out over time—for example, investing an equal amount of cash every month for 12 months. This can be a good way to ease yourself into the market, since investments are made over time at various prices per share. The potential downside is that you may miss out on returns if the market is rising.
Investing it all at once is called “lump-sum investing.” It is tricky because your investments’ performance depends on how the market is performing on the date that you invest. If you time it correctly, you might generate higher returns than dollar-cost averaging. On the other hand, you might generate lower returns if you put all of your money into the market at the wrong time.
Taking some time to understand these concepts and how they relate to your individual investment strategy can help you feel more confident when making decisions about where to put your money for the long term. Working with your Financial Advisor to create a balanced portfolio, customized for your unique needs and preferences, puts you in the right position to meet your goals.
Personalized Financial Advice
Build a plan to help you navigate your complex financial decisions and achieve the future you want, with a Morgan Stanley Global Sports and Entertainment Financial Advisor dedicated to serving the needs of professional athletes.
Start the conversation: whatmovesyou@morganstanley.com
