Invest Basic Tips

Learning how to invest your money is one of the most important lessons in life. You don’t need to be college educated to start investing, in fact, you don’t even need to be a high school graduate. You just need to have a basic understanding of business and have the confidence to make a plan — consider it a business plan for your life. You can do it.

Why Investing Can Be Scary

For many of us, money and investments weren’t discussed at home. These subjects may even be taboo within certain households — quite possibly, in households that don’t have much money or investments.If your parents or loved-ones aren’t financially independent, they probably can’t give you good financial advice (despite their best intentions). And even if your family is well-off, there’s no guarantee that their financial advice makes sense for you. Plenty of parents encouraged their kids to buy a house during the peak of the housing bubble, because in their lifetimes, housing only went up.Having said all of this, the first investment that you make will probably be the hardest.

The Goal of Investing

Of course, everyone has different financial goals — and the more you learn, the more confident you’ll be in determining your own path. But here’s a basic financial goal to strive toward:

Over decades of hard work, I would like to make more money than I spend and invest the difference. By the time I retire, I would like my investments to throw off enough cash — through dividends or interest — that I can live on this income without having to sell my investments.

Notice the first part of this goal is about hard work. If you’re hoping to take a little bit of money and gamble it into a fortune in the stock market, you can stop reading now, this article isn’t written for you. But if you plan to work for a few decades, and want to make sure that you don’t have to work until life’s end, you’ll need to spend less than you make and invest the difference.Also, you’ll notice that this goal doesn’t recommend selling your investments. Rich people don’t sell-off their assets for spending money — if they did, they wouldn’t be rich for long. They stay rich because their assets provide enough cash flow to support their lifestyle. And these cash-producing assets, through careful estate planning, can be passed down from generation to generation.Enjoying your twilight years by living off your investment income — and having something left over for your loved ones or a charitable organization — is something that all investors should aspire to. It may not be possible for everyone, but it’s the right attitude.

What Should I Invest In?

The most common investments are stocks and bonds, which most financial advisers agree should be held in some proportion based upon your personal circumstances. Stocks represent partial ownership of a company and bonds are a form of “I owe you.” Mutual funds can own stocks or bonds or both on your behalf. (If you are unfamiliar with stocks, bonds or mutual funds, you should bookmark this article and return to it after you’ve learned more about each of these asset classes.)There are other ways to invest — for instance, real estate investment trusts (REITs) — and these types of investments have their place. But you needn’t focus on them if you are just starting out — sticking to stocks and bonds (and the funds that hold them) is just fine. But if you have debt — whether, it’s credit card debt, mortgage debt or student loans — it may not make sense for you to own bonds, or, to invest at all.

Should I Invest or Pay Down Debt?

It should go without saying that if you can’t make the minimum payments on your debts, you should not be investing at all. But if you have extra money left over from each paycheck, you have a few choices that can each have a positive impact on your finances:

1.) Use all of your extra money to pay down debts (mortgage, credit card, student loans).

If you have interest payments that are higher than 10%, you are almost certainly better off paying down debt than investing. The stock market has returned about 11% per year in the long-term ( far less if you consider taxes and fees), but there are no guarantees in stock investing. Your debt, however, is guaranteed — sometimes, even after bankruptcy.

2.) Use all of your extra money to buy investments (stocks, bonds, funds).

This only makes sense if your debts aren’t costing you much, in other words, if the interest rate that you’re paying is low. If your debts are costing less than 5% interest, you may be better served (in the long-term) by investing your extra money in carefully chosen stocks or stock funds. If your mortgage is costing you 5%, it makes no sense to buy a bond or bond fund that yields 2%. A bond that pays you less in interest than the interest payments on your personal debt is not worth buying. And even if a bond pays you higher interest than what you owe, that doesn’t mean it’s always a good investment.

3.) Use some of your extra money to buy investments and some to pay down debts.

Benjamin Graham — Warren Buffett’s teacher — once suggested that investors should hold no more than 75% of their investment money in a single asset class (he was referring to stocks vs. bonds). You can apply this same logic when deciding how much of your extra money should be used to make investments.If you treat your low-interest debt like a bond, then, at minimum, you’d use 25% of your extra income to pay this debt off — the remainder could be invested in stocks. If stocks or stock funds became too expensive (remember, the higher the stock market climbs, the more expensive it becomes), then you could use as much as 75% of your extra income to retire debt and the remaining 25% to buy stocks, despite their high prices.Ultimately, you should pay down your debts with the highest-interest rates first. For more complicated situations, it may be best to consult a fee-only financial adviserwho is familiar with your personal situation. A financial planner is only as good as the information that he or she is provided with, so if you consult an adviser, be sure to mention all of your debts as well as your investments and investment ideas.

Know the Difference Between Saving and Investing

There are a few steps before you can become a successful investor: you being employed, having essential insurance coverage, having your personal debts under control and having an emergency savings account in case you lose your job.Your investments and your savings are very different things. What if the stock market crashes and you lose your job? If you do not have a cash savings account — and your unemployment benefits do not cover your living expenses — you’ll probably have to sell your investments at the worst possible time. Don’t fall into this trap.

Two Strategies for Lifetime Investing

The two investing strategies below assume that you have a very long investment horizon — in other words, you plan on working for the next few decades. The first strategy requires minimal effort. The second strategy may seem to require minimal effort, but it requires far more investor education than you’ll find in this article alone.

1.) Investing in Mutual Funds With a Margin of Safety

Jack Bogle — founder of The Vanguard Group — has dedicated half-of his life to demonstrating how no-load low-cost index mutual funds (specifically, those that buy the entire stock market) are the best way for an investor to succeed. By dollar-cost averaging — the practice of buying the same dollar amount of a fund on a regular schedule — investors needn’t worry about timing their purchases. Their average purchase price will ultimately reflect a “fair” value.

2.) Buying and Holding Carefully Chosen Stocks

“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks,” wrote Benjamin Graham in his classic book The Intelligent Investor.It’s true: If you buy a total stock market index fund at regular intervals over a long enough timeline, you will almost certainly have satisfactory results. Yet many investors forgo the financial rewards of simplified investing for the psychological reward of “stock picking.”For small- or beginning-investors, trading stocks is a fool’s game. If you buy $500 worth of stock, minus a $10 commission to your stock broker — then sell the stock after it rises 4%, again, minus a $10 commission, you’ve gained nothing. If you do make winning trades, transaction costs and taxes will eat away at your returns, not to mention you’ll be trading against PhD-level mathematicians and the computer programs they’ve written to pick your pockets.But there is long-term value to be had in buying the stocks of great companies and holding on to them for many years. Even more so if your stocks pay dividends (an actual cash payment of the company’s profits). The amount of wealth that reinvested dividends can create is simply amazing. What’s even more amazing is that many online stock brokers offer dividend reinvestment as a free service. This luxury gives the patient investor an even bigger advantage over the frenetic stock trader.

Both comments and pings are currently closed.

Comments are closed.