Vail Valley Financial Focus: Are your investments working as hard as you are?
Vail, CO, Colorado
On Labor Day, we celebrate the achievements of the American worker. As someone who works hard yourself, you can appreciate this holiday.
Of course, you hope your efforts will eventually result in achieving your important goals, such as college for your children or a comfortable retirement. But if you’re going to turn these objectives into reality, your money needs to work as hard as you do.
What steps can you take to help make sure your money is working hard for you? For starters, consider keeping the money you may need in the near future in investments that pay minimal rates of return. These investments can offer you liquidity – in other words, it’s no problem to get at your money when you need it. But you can find some investments that offer liquidity and can pay a more attractive rate of return – investments that may work harder for you.
Another reason you may keep money in a low-rate investment is that such investments typically offer greater protection of principal than an investment such as a stock. And this is certainly true, because stock prices will always fluctuate, and the return of your principal is not guaranteed.
Nonetheless, stocks have historically offered returns that have been higher than the inflation rate, although as you’ve no doubt heard, past performance is not a guarantee of future results. And if your investments do not keep up with inflation, you could lose significant purchasing power over time.
Clearly, then, your goal should be to make sure your savings and investments are working hard for you without taking on more risk than you would like. And one of the greatest risks occurs when you have all your money tied up in just one type of investment. When a market downturn strikes a particular group of investments, and you have no other investments to help cushion the blow, your portfolio could take a sizable hit.
One way to help lower your risk level is to spread, or diversify, your money among a range of investments, such as stocks, bonds and government securities. And while diversification can’t guarantee a profit or protect against loss, it can help you reduce the effects of volatility.
Another way to make sure your investments are working hard for you is to have them “multi-task.” Consider your 401(k) or other employer-sponsored retirement plan. Not only does your money have the opportunity to grow on a tax-deferred basis, which means it can accumulate faster than if it were placed in an investment on which you paid taxes every year, but also your contributions are generally made with pretax dollars, so the more you contribute, the lower your taxable income.
Such double duty is a great way to keep your money working hard for you. The same principle may apply to your traditional IRA, assuming your income level qualifies you to make deductible contributions.
Labor Day comes and goes quickly. But by making the right moves, you can help ensure your money is working hard for you 365 days a year.
This article was written by Edward Jones for use by local Edward Jones Financial Advisers. Taylor Leary, Tina DeWitt, Charlie Wick and Kevin Brubeck are financial advisers with Edward Jones Investments. They can be reached in Vail at 970-476-1791, in Edwards at 970-926-1728 or in Eagle at 970-328-4959.