Personal Finance- Saving & Investing

You will hopefully achieve the situation where- owing to your earnings exceeding your total expenses over an extended period- you begin to amass some savings. You then will have options as to what to do with your savings. In general, there is a direct correlation between risk and expected returns. You can fairly accurately describe the situation visually by drawing an upward sloping line, represented on a graph such that risk is along the horizontal axis and expected returns on the vertical axis. Low risk/low return investments include savings accounts and investment CDs at the extreme lower left, with a risk of virtually zero (if under $250,000 at an FDIC-insured bank). Moving slightly up on the line, we have money market funds; money that has been deposited into investment banks and not presently invested in stocks, bonds, etc. is often automatically held in money market funds when being held on the sidelines. While superficially almost indistinguishable from savings account and almost equally liquid, they do involve investment in short-term notes and bonds, and thus have a slight risk. Returns are better than most savings accounts, commensurate with CDs of several months (with the benefit that your money is not tied up for several months with these funds). Higher returns come with the price of slight risk; losses are rare, but possible. In 2008, at the height of the recent financial crisis, some money market funds lost as much as 3% in value. Although significant, this is far less than the losses of 50% or more faced by investors and retirees highly invested in the stock market. Moving further up this line, highly rated "safe" bonds, such as municipal and government bonds, offer higher returns, well over 2%. (Being tax-free, this usually converts to over 3% on taxable bonds). The government being unlikely to collapse and default, we consider these bonds safe. Corporate bonds of large companies are a bit further up, as there is the potential of even such large companies failing unexpectedly; thus, we would expect higher interest rates from such corporate bonds. Moving up further still, we reach "junk bonds"- bonds with low ratings, usually owing to uncertainty regarding a company's stability. For accepting such uncertainty, investors expect the highest returns among bonds. Approaching the upper right area of this line, high risk/high returns, we find stocks. Moving up along the line, we first pass conservative stocks (large companies unlikely to fail), and then progressively speculative stocks, with progressively risky stocks valued to provide increasing expected returns. Finally, at the upper right end we find the most speculative investments, such as venture capital, money offered by investors in return for equity in companies with an at-best shaky likelihood of success. Venture capitalist demand extremely high returns, with 40-50% being reasonable, given the strong possibility they will lose their entire investment. The decision of how to invest is ultimately up to you. You must decide how much risk you are willing to accept in order to increase your expected returns. Investment firms managing large portfolios, such as family trusts, tend to diversify and hold a mixture of bond and stock funds, a "moderate" approach allowing for moderate returns with moderate risk; you might find such an approach for savings you want to have appreciate in the long-term without excessive risk. Use of stockbrokers in brokerage firms for purchasing individual stocks or stock indices has fallen drastically over the past decade. In lieu of paying stockbrokers hundreds of dollars per trade, investors can invest with online investment firms, with commissions as low as $10 per trade, and financial information once provided by stockbrokers is now easily accessible online.