Tips on Investing Your Money

Figuring out how to invest your money may seem a daunting, dangerous task, fraught with uncertainty and lots of potentially bad decisions. Fear not. With these simple investing tips, you'll be on the road to saving smartly.

Consider your risk profile

Are you retiring in 20 years or in 12 months? The amount of time you have before you need your retirement money is the basis for determining your risk profile. If you've got several decades before you need that money, your risk profile can be on the high side, allowing you to put your money in more volatile, higher return investments that can be corrected over time. However, if you need your money soon, you'll want to be more conservative with your investments so that you don't erode the nest egg that you'll be using before long.

Asset allocation

Wise money management begins with something we're always told to do right, but might not understand: asset allocation. Here you'll refer to your risk profile. Safer investments net lower rewards, but will safeguard the retirement dollars you have, especially if needed in the short term.

For the most conservative and short-term investors, a money market account delivers the least volatility and lowest return on your money. Bonds are also a relatively safe investment, so a low-risk allocation should have more assets in the bond market and less in the higher risk, higher return stock market. With a higher risk profile, put more money in the stock market, whose ups and downs still make it the best long-term return, with an estimated 10% annually over the long haul.

How much should I invest and in what?

As a general rule of thumb, a person retiring in 15 years, with low tolerance for risk should invest approximately 50 percent of their money in the stock market, 40 percent in bonds and 10 percent in a money market account. If retirement is planned for 25 years down the line, the amount in stocks could rise to between 70 and 80 percent. One formula suggests subtracting your current age from 100 and then investing the resulting percentage in stocks, the rest in bonds. For the stock portion of your portfolio, approximately 70 percent should be in the traditionally more stable domestic market, with the rest in international funds.

You will then want to break down your stock investments between small-, mid- and large-cap funds (each one referring to the respective size of the company) and your bonds into short-, medium- and long-term. The options can feel mind-boggling, so it might help to talk to a financial advisor or get ready to do your homework on sites such as The Motley Fool, SmartMoney and CNNMoney.com.

Knowing how to invest your money is not as difficult you might think, but money management does require strategy and vigilance - yours or your financial advisor's. Diversify, research and get busy!