One of the myths I hear is that investing is just for people with a degree in finance or business, but many investors are just ordinary people. Today’s blog will introduce you to three tips that will help you understand more about investing.
Tip 1: Set your investing goals – Decide what your investing goals are and commit them to paper. A great free downloadable financial goals form to use for this step can be found at: http://www.financialliteracymonth.com/30Steps/Step12.aspx.
Remember to make those goals SMART goals: Specific, Measurable, Attainable, Realistic, and Time bound. The worksheet breaks your goals into short-term, mid-term and long-term. It allows you to set a target date to attain the goal, the cost-estimate, the amount already saved, and amount needed per month to reach the goal.
Tip 2: Determine the mix of investments – Once you have committed your goals to paper, plan the mix of investment vehicles that you will use to reach the goals. This step is different for everyone and your stage in life will play a key role in how long you have to reach that goal. What I mean by investment vehicles is what types of investments will you make. We also refer to this mix as the asset allocation for your portfolio. Will you use stocks, bonds, mutual funds, annuities, etc. to reach the goal? At this point, you may need to consult with a financial planner to help you determine which ones work best for your specific scenario.
There are 3 main asset classes: stocks, bonds, and cash & equivalents. Stocks, also called equities, represent ownership in a company. As an example, McDonald’s stock symbol is MCD on the stock exchange. We could place an order today and purchase shares of McDonalds’s stock (equities).
Bonds (debt) are a type of fixed income. An investor can purchase a bond and will receive interest payments until the bond matures. Once it reaches the maturity date, the principal of the bond will be repaid to the purchaser.
Cash is considered one of the safest investments, but the risks and returns are lower than with some other asset classes. It is wise to keep a certain amount of your investments in cash in case of emergencies.
Once you choose the mix of investments for your portfolio, you will need to consider diversification which means spreading the risk by investing in more than one specific investment instrument. It would probably not be a wise choice to just purchase one particular item such as McDonald’s stock. What would happen to your portfolio if all you had was McDonald’s stock and the price fell drastically? You would lose value in your portfolio. If on the other hand your portfolio included stock in McDonalds, Wal-Mart, GE, Apple, and Nike along with bonds and cash then we would say that your portfolio was more diversified. I don’t advise including only one type of investment. The risk needs to be spread around in order to minimize losses.
Lastly, identify how much risk you are willing to take in your portfolio. If you’re young, you would be able to bear more risk than a 68 year old could bear since you have longer to recover any losses you might incur. Each person’s risk tolerance is different, so decide how much works best for your situation.
Tip #3: Invest for the long haul – Investing is not a once and done activity. Your portfolio will need to be rebalanced from time to time. Strategies will need to be updated as retirement age approaches and when life’s activities occur. Investors are in it for the long haul, so don’t panic every time the market drops and sell everything in your portfolio. Many times this is when mistakes happen. Stay on task and stay focused on the end result!