Researching Your Investments
By: AARP Education & Outreach | Source: AARP.org | March 20, 2005
Don't invest without reading and investigating. Later on, you'll be glad you did.
Read a few books
Read a few books about investing. You'll find a wide assortment of them in your local library or bookstore. These books will give you important information about how the world of investing works. They also will help you feel more comfortable with and confident about investing.
Choose a few investments
Continue your research by choosing a few investments that you want to learn more about. Then, you must work hard to learn more about these investments.
Conduct a Search
You can research your possible investments in a variety of ways:
- You can find good coverage of stocks, bonds, and mutual funds in finance magazines and newspapers. Use your library's computer to search for recent articles about your investment.
- Several independent organizations rate stocks, bonds, and mutual funds. These organizations can give you a good feel for your investment's risk level, average annual return, and long-term strength. For more information, see the reference section below.
- Compare the performance of your stocks to similar stocks by checking with a popular index, like the Dow Jones Industrial Average. An index is a representative sampling of companies in a certain part of the stock market. There are indexes for large and small company stocks, as well as corporate and municipal bonds. Indexes allow you to compare how your stock is performing relative to similar products. Choose the index that is most similar to your stock. You'll want your stock to do as well as, or better than, the index. Check out the AARP chart of " Common Indexes ."
Make Some Calls
You may want to call a full-service brokerage house and a financial adviser to see how they rate the investment you are considering.
If you're researching a mutual fund, call the fund and request a prospectus, an annual report, a "Statement of Additional Information," and an application. Read this information before you decide whether and where to invest.
Recognize the Drawbacks of Research
No matter how much research you do, there's always a chance that the investment you choose won't be the right one. That's because no one - not economists, advisers, brokers, accountants, or rating agencies - really knows what will happen tomorrow, next week, or next year on Wall Street. For example, ratings report a mutual fund or a company's past performance. That's all. Ratings give you absolutely no information about future performance.
Because of this uncertainty, it is important that you work hard to own a diversified mix of stocks, bonds, and mutual funds. Diversifying means that you put your money into a variety of investment products. It also means that you invest in a variety of companies and in a variety of industries. If your portfolio is diversified, losses in one area of your portfolio should be offset by gains in other areas of the portfolio. Your diversified portfolio should gradually increase in value, and shouldn't be subject to wild losses or gains.
Rating Agencies
If you're thinking of investing in a particular company - or buying a particular bond - check first to see what grade the company earned from the leading ratings agencies. Remember, though, that ratings only report on a company's past performance, and don't predict future success.
Morningstar
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