Why is investing so important? Investing is the vehicle that drives your goals to reality, especially for your retirement. If you just put your money in a regular savings account, chances are it isn’t going to grow to the amount you need to retire successfully. While there is a great deal of risk associated with investing, if you understand your risk and manage your investments regularly, investing can be the difference between retiring and not retiring. However, many of us are terrified of investing, therefore, we are either not investing at all or not investing properly. Follow these guidelines to make investing as simple as possible.
For amateur investors, mutual funds are the way to go. They offer diversification, professional money management and ease into the actual mutual funds with low minimums. The chief complaint against mutual fund is their fees. This can be managed by sticking to no-load mutual funds and keeping your expense ratios low (below 1.50%). Individual stocks need ongoing monitoring, which most of us don’t have the time to do. Also, most stock portfolios are not properly diversified. If you do buy stocks, stick to companies that you know well and plan to hold on to for a long time. Make sure they are part of a diversified portfolio.
It is very important to pick your time frame (when you want the money) and your risk level. Make sure both of these are aligned with your goals. For example, if you want the money in less than five years to save for a down payment on a house or a vacation, you should keep it in very safe investments, like a money market account. Whereas if you want the money in twenty years or longer (i.e. retirement), you are able to take on a bit more risk. Your risk level is determined if you are conservative, moderate or aggressive. Think about recent decisions you made in your personal life and apply this to your investments.
Regardless of your risk level, you need to be diversified. This means spreading your money over different types of investments, therefore, spreading your risk around. How you spread your money among different investments is called your asset allocation plan. To keep your investments as simple as possible, limit your portfolio to no more than five mutual funds. You can also choose one Lifecycle or Target Retirement Date mutual funds. This is one mutual fund that provides a diversified portfolio based on when you want your money. Most mutual companies offer them.
Even if you have a financial advisor, you should know what is going on and understand what you own. The more you know about your investments, the better your relationship with your financial advisor will be. On an ongoing basis, take charge of your investments and learn more about them. You can do this by taking a course, opening your statements, reading a book, reading the business section of the newspaper or investing articles on websites. Magazines like Money, Smart Money, Kiplinger are geared towards people that are not in the financial industry and are fun to read. Start with the cover article; don’t try and read the whole thing, just spend 10 minutes a week. It will be much more manageable and you will enjoy it!
(Copyright Down-to-Earth Finance LLC 2006)