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Experts say the best place to start is by simply analyzing your financial statements each month to see how your investments are performing. Take the time to read a reliable financial publication such as Barron's or The Wall Street Journal, and make a pledge to tackle at least one personal finance book a year. Equally important is talking to family and friends about their investment strategies and their sources of financial insight.
Once you really get going with your advance work, however, you'll need to focus on four crucial aspects of investing: types of risk; asset allocation and diversification; the essential ingredients of a mutual fund; and volatility versus rate of return. While you may still require the counsel of a professional in creating a financial plan, you can find a great deal of information, tools, and research on Fidelity.com. To help you get started, here's a closer look at the key areas.
Types of risk and potential rewards: to make big investment gains, you have to take on some risk. Most people think of investment risks as being market risks. But there are many types of risks. Some that may have a big impact on your portfolio include:
The longer a bond's maturity, the greater the impact a change in interest rates can have on its price. Should you sell before the bond reaches maturity and there's been a significant rise in interest rates, then the value of your investment may decline.
Different sectors of the fixed-income market react differently to interest rate changes. U.S. government bonds, for example, are often the most sensitive, thanks to their high credit quality. Adjustable-rate mortgages and floating-rate bank loans tend to be less sensitive, because their rates are reset periodically.
Inflation. When prices of goods and services rise, the buying power of assets decreases. The risk is that your portfolio's growth won't keep up with the cost of living. That's of huge importance when it comes to retirement planning. In fact, if you're not careful, even modest inflation can erode your buying power. An inflation rate of, say, 3% could mean that a couple living on $72,000 today would need about twice as much to live on in 25 years.
If you're really pressed for time and simply can't do the legwork, you have other options. For example, lifecycle funds, such as Fidelity Freedom Funds offer a diversified mix of stocks and short-term instruments that become increasingly conservative in approach as you near your specified retirement date. By providing the benefits of a diversified set of mutual funds with a professionally designed asset allocation model, Freedom Funds are a good alternative for some investors.
Another option is Fidelity's Portfolio Advisory Service Investors get access to experienced professionals who will examine your specific objectives, risk tolerance, and time frame in order to identify an appropriate asset allocation strategy and mutual fund mix for reaching your goals. They also conduct annual reviews to make sure your investment strategy is on track. The bottom line: Becoming an informed investor takes commitment, but the benefits can make the time spent worthwhile.
How Fidelity can help