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Sunday, August 1, 2010

Investing for Growth, Yield & Income

You've probably been listening all over about the fortunes being made in the stock market. With enough patience and a lot of discipline, you are almost guaranteed to make a considerable amount of money in the markets.

You merely need a willingness to put your savings to work in a balanced portfolio of securities tailored to your age and circumstances.

But you do have to understand how investing works. Investing is not about throwing all your money into the XYZ stock hoping to make a killing. Investing has nothing to do with getting a stock tip from your brother-in-law! Investing isn't gambling or speculation.

Investing is taking reasonable risks to earn steady rewards.

Investing works because it allows you to participate in the relentless growth of the world's economy, which hardly follows a straight line, but does trend upward over time. It's also true that the longer you stay invested, the faster your money will grow.

When you are determining your investment strategy you will always have to consider the following three elements:

1. Growth:

Growth is the rate at which your money appreciates during the time it is invested.

If you think you will need access to your funds sooner rather than later, look for an investment that provides a fairly safe and steady growth rate.

Long-term investments that are influenced by factors such as the inflation rate may lose money in the short term, but they can still grow over long-term. What will matter is not a slow growth rate (or even a loss) during a particular period, but a higher growth rate over time.

2. Yield:

Yield is the interest or dividends paid on your investment. Like growth, it can vary in importance depending on your needs.

If you are retired and your investment is funding your retirement, your investments should generate enough yield to let you live on the interest.

Savings accounts tend to yield small percentages. Stocks can yield the highest percentages but also have the greatest risk.

3. Income:

Income is closely related to yield. Does your investment, or the yield from your investment, make up a significant portion of your income.

If so, you may want to be more conservative with your investment choices to ensure that the amount of yield it produces remains consistent and reliable.

You should give careful consideration to where and how often you want to reinvest your money, as it could effect your financial security.