Learn the Language and Protect Yourself When Investing

03/29/98 BOZEMAN - - When you’ve made the necessary choices, even sacrifices, to be able to save, you still face the choice about where to invest your savings. How can a person decide how and where to invest savings? Where should you invest in to be financially secure at retirement?

There are no guarantees. You can only do your best to make informed decisions, and that probably means seeking both information and advice, says Marsha Goetting, Montana State University Extension family economics specialist.

"The world of finance has its own language, and it is best if you take the time to learn some of that language," says Goetting. You can let an advisor make choices for you, but the more you learn, the more your investments will reflect your own priorities and desires for security versus risk.

Before you can decide where to invest your money, you must determine a goal for your investments. Depending upon your objectives and time frame, investments can be selected to provide income, growth or tax savings.

One of the factors every investor needs to consider is the safety and risk of principal.

Principal is the amount of money you invest. Consider the safety and risk to your principal at the same time you think about how much you can reasonably hope to earn from your investment. Investments often "pay-off" more if they are considered riskier and less if they are considered very safe. This pay-off is called "return on investment" or "yield of investment." This refers to how much you make in addition to your principal.

You have to balance your financial needs with the amount of risk you are willing to tolerate. Stocks, bonds and mutual funds are rated for risk by rating services. Some investments are guaranteed or insured. Is that the case for the investments you are considering? If so, then ask yourself who is doing the insuring and whether there a limit on the amount that is covered by the insurance.

How much risk are you willing to accept? Are you willing to chance losing some or all of the money you invest? Will you be able to sleep at night after making your decisions? The balance you choose between safey and risk must fit your own comfort level.

Another term that comes into play is "liquidity."How quickly and easily can you sell or cash in your investment without losing some of your principal? That’s one part of liquidity. The fees associated with your initial investment, and what are the penalites if you decide to get out of the investment are other aspects of liquidity.

How well an investment has done in the past year and for the past three, five and ten years is called its history. The history of an investment alternative provides useful information, especially if you see a pattern. For instance, you may notice that a certain investment company performed well in high-inflation years but not in low-inflation years. However, one of the standard disclaimers about investments is that "past performance does not predict future performance." Even as a broker or advisor recites that phase to you, he or she probably will be showing you a graph of how well the company’s history has been.

You can add histocial information to your considerations as you make investment choices, but there is never a guarantee of future performance. Times and situations change, from Asian markets and oil prices rising or falling to new inventions that cause dramatic changes.

Another consideration is whether the term of the investment is compatible with your needs and goals. If it ties up money you need within the investment period, it isn’t be for you.

Also consider how much monitoring a given investment requires.

Your investment planning should reflect your financial goals, personal circumstances, future income needs and tolerance for risk. Your plan should consider your age, years until retirement, current and anticipated income, emergency provisions, education of children, care for aging family members.

Send questions or comments to Goetting and Carol Flaherty, MSU Communications Services, Bozeman, MT 59717 or email them at carolf@montana.edu.

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