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The basics of investing

What should you know before you start investing? It might help to consider a typical investor. Take Sally, a recent college graduate who is starting her first job. To help explain six important investing principles, we'll follow her as she decides how to invest for her future.

Step 1: Start investing early.
Time can be an ally when saving. Sally decides to take the important step of making saving a priority by adding it into her monthly budget. She also starts paying herself first. This means she saves regularly before making personal purchases.
Step 2: Start small.
Sally starts with a goal of saving 10% of her income for retirement. This amount includes her employer's matching contributions. Sally understands it might not be possible to save the full amount early in her career. Yet she also knows saving smaller amounts, below her 10% goal, is better than not saving at all. As Sally's income increases or expenses decrease, she can increase her retirement savings.
Step 3: Stay committed to investment goals.
Saving for long-term goals can require patience and discipline. To help herself save every month, Sally creates a savings plan and includes savings in her budget. This supports the pay yourself first strategy that she's following.
Step 4: Diversify investments.
Sally decides to spread her investments across different asset classes to help protect her wealth. She doesn't want her hard-earned money to disappear by investing in a single company that might fail.
Step 5: Consider investment goals and time horizons.
A time horizon is the time an investor plans to hold an investment before the money is needed. This amount of time determines how much risk Sally can take with her money and the types of accounts she chooses. Sally also needs to consider an account's potential tax advantages and penalties.
Step 6: Manage emotions during volatile markets.
Sally's investments should reflect her long-term savings goal of retirement. During times of market volatility, she'll need to revisit her investing plan but not act hastily.

As you start and continue on your investing journey, it can be helpful to keep these basic investing principles in mind. Like Sally, you could make decisions that match your risk tolerance and savings goals.

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Plan for what's ahead.

Are you planning for or living in retirement? It's important to understand some of the challenges investors may face in this phase of life. With a knowledge of potential risks and solutions, you can better manage what's ahead.

Meet two new retirees.

Consider Hector and Liz, both recently retired. They look forward to enjoying the results of years of hard work and saving for retirement. But they can't enjoy their ideal retirement with just their Social Security and pension income. This means their investment accounts must do double duty.

Liz and Hector want their investments to continue growing as they also use some of them to meet their wants and needs. This will help conserve their spending power over time.

Key investment risks

Various risks can lead to a loss in the value of investment assets during retirement. These may be assets that are needed for essential or nonessential living expenses, emergencies or leaving a legacy.

Liz and Hector decide to learn about investment risks that could derail their retirement plan.

  • Asset Allocation

    Investing that's too conservative or aggressive, or that lacks diversification.

  • Excess Withdrawals

    Draining retirement assets too early through excessive withdrawals. This includes regular payouts based on a withdrawal plan.

  • Inflation

    The possibility that increases in the price of goods and services may impact an investor's ability to maintain the desired standard of living.

  • Legacy

    Not having the financial resources to keep up with retirement needs and still leave a legacy.

  • Liquidity

    Not having assets available to support unexpected cash flow needs.

  • Market

    Certain events that can affect the performance of an entire market or asset class, such as an interest rate change.

  • Tax Expense

    A slowdown on investment returns due to various factors. These can include taxes, commissions, expenses, immediate or deferred sales charges, and trading or transaction costs.

  • Sequence of Returns

    Returns related to the timing of events, such as retiring right before years of high inflation or a market crash. The combined impact of making ongoing withdrawals for income and suffering losses from riskier investments can devastate a portfolio.

  • Interest Rate

    Includes price and reinvestment risks. Generally, price risk means as interest rates go up, bond prices go down, and vice-versa. Reinvestment risk is the possibility that when an investment matures, you may get a lower interest rate when you reinvest.

Financial and lifestyle solutions

After learning about investment risks that are likely, Hector and Liz identify these potential solutions:

  • Mortgage choices

    Paying off their mortgage or using a reverse mortgage to free up income

  • Asset use

    Including all their retirement assets like pensions and Social Security benefits when planning the use of resources

  • Emergency savings

    Keeping adequate cash on hand for short-term needs or emergencies

  • Legacy changes

    Reducing gifting and legacy goals, or using life insurance to fund legacy wishes

  • Portfolio mix

    Diversifying their investments and buying inflation-protected securities like bonds

  • Guaranteed income

    Dedicating some assets to create guaranteed income that provides immediate or future income

  • Investment timing

    Choosing investments that are appropriate for their ages

  • Home costs

    Downsizing their home or relocating to an area with a lower cost of living

  • Retirement and benefits timing

    Delaying the start of retirement or claiming Social Security benefits later

  • Cost cutting

    Reducing expenses when possible, especially for nonessential items like entertainment

Realizing you only get one chance to get retirement right, Liz and Hector make an investment plan that's best suited for their situation. They get help developing the plan and ask for guidance before making critical retirement decisions. The two retirees also seek legal and tax assistance when needed, along with retirement and financial planning advice.

Key takeaways for navigating retirement

  1. Understand the various investment risks that may affect a retirement plan.

    There are many investment risks you may not face when you're growing your money. But you may need to address them as you begin to spend assets on retirement expenses.

  2. Identify potential solutions for the risks that could cause more financial damage and are likely to affect you.

    Consider potential financial and nonfinancial solutions that may help reduce some of the investment risks during retirement.

  3. Make an investment plan that's best suited for your situation.

    Not every investment risk that Hector and Liz considered may apply to every retiree. Each situation is unique, so tailor your retirement investment plan to your needs.

With investing, remember that past performance is not a guarantee of future results. These principles and tips won't guarantee reaching your goals. But they could reduce your risk and improve your chances of retirement success.

Broker Check by Finra

Learn more about USAA Investment Services Company, Charles Schwab or Victory Capital Services, Inc. on FINRA's BrokerCheck website.