No one would say the world of finance is easy. With all the responsibilities you juggle—personally and professionally—you may wonder where to start.
What are you saving for? How much time do you have to save? How much should you save? How do you choose investments? These are questions TIAA financial consultants hear all the time. Whatever your goals are—whether it’s to start a degree program next year, build a college fund for your child or retire in 30 years— investing can be a little easier when you take a few minutes to understand some key points.
What kind of investor are you?
“Risk tolerance” is a technical term used to help identify your attitudes regarding investing—how you feel about losses and gains. It’s a good place to begin as you consider investing. For instance:
- Do you become anxious if you see your retirement account go down even a little? Then you’d be a conservative investor with a portfolio of investments with lower risk levels—so you’d be better protected from potential losses but have less potential for higher gains.
- Are you willing to take on more investment risk in exchange for potentially higher returns? That would make you a more aggressive investor, willing to endure market fluctuations. Higher risk investments might have higher potential for gain, but they also might be more susceptible to loss.
Most of us don’t fit neatly into one category or another, even if you think you do. Further, your risk tolerance may change depending on how much time you have to reach your goals. For instance, making sure you save enough to meet the next tuition payment is different from retiring 30 years from now. Check out this questionnaire to help you assess the kind of investor you are.
Why it matters
The stock market stability many investors have enjoyed in the past has been shaken, and many investors have become skittish, gravitating toward being overly conservative. That could be a mistake. It’s important to remember that asset types—stocks, bonds, real estate, even cash—have some form of uncertainty built in.1
It can be scary, but you can’t avoid risk altogether since you’ll need to continue to grow your savings so you’re prepared for potential challenges later in retirement— like inflation, longer life expectancy or accident/illness. It’s not just about protecting your assets from market volatility. It’s about having enough income to last your lifetime.
Diversifying your retirement savings across different kinds of investments, or asset classes, can help balance risk and reward based on a risk level you are comfortable with.2 Historically, having a mix of investments can offer growth and a degree of stability over the long term.
Many employers offer a target-date fund option in their retirement plans that can balance time and risk automatically for you. It’s a mutual fund that offers a diversified strategy in a single fund, investing for growth in your early years, then gradually transitioning to more conservative investments as you approach retirement.
Put time on your side
No matter what kind of investor you are, the earlier you start, the more time you have to grow your savings. You can harness the power of compound interest. Compounding happens when earnings on your savings are reinvested. They in turn generate their own earnings, and so on. Over decades, compounding can add a lot of fuel to the growth of your savings.
Further, when markets hit a rough patch like they did in early 2020, time can be your ally, giving investments a chance to recoup any losses.
Schedule an annual financial checkup
Managing all your competing priorities can be a job in itself. It’s OK to ask for help. Meet with a TIAA financial consultant—think of it like an annual physical. You’ll get help reviewing your goals and how you’re invested so your savings can stay on track. Schedule a meeting with a TIAA financial consultant virtually or by phone at 800-732-8353.