Monthly Archives: July 2016

Investing and Educating Yourself

Some people say they have no money or too little income and, thus, can’t afford to invest any of it. Let’s get something very clear right from the start of this article: you can’t afford not to invest. If you don’t start putting aside a good portion (at least 10%) of your earnings into investments – if you don’t start building a portfolio for yourself – you’ll find yourself in a very precarious financial position as you approach your declining years. When you’re facing the day you can no longer work as much or you’d just like to retire, and you realize you can’t afford to retire comfortably, you’ll wish you’d thought ahead a bit better and planned for such a day by investing when you were younger.

Educate Yourself – That said, it helps to know something about investing, even if you have an automatic retirement account, a financial planner, or savvy assistance from friends. To inform yourself, talk to some successful investors, read books and articles, and watch some videos. Try starting with Eric Tyson’s Investing. Of course, there’s an enormous amount of help online. Try Charles Schwab, Merrill-Lynch, CNN Money, Ameritrade, or Etrade. They all have terrific websites with a wealth of information. You could also take a class at the local college or go to a live financial planning seminar. There’s also a good non-profit organization called the American Association of Individual Investors which offers educational materials and holds seminars on various topics.

Formulate an Investment Strategy – Just as with anything else, a plan will increase your chances of success. Take stock of your assets, income, short-term goals, and long-term financial destination. As I said earlier, you should invest a minimum of 10% of your income – a lot more if you’re able. So think about it: how much money do you have and how much can you put aside? What do you want your investment portfolio to do for you? Help you retire at 55, 60, 65? Or provide you with additional income as soon as possible? Exactly what do you want to accomplish with your money? After you come up with answer to those questions, you’ll be better able to select the right investments and the right combination of assets to meet your financial goals.

Questions to Ask Yourself:

  • How much money can you invest right now?
  • Do you have any outstanding debts?
  • Are you planning on purchasing any large ticket items?
  • What’s the total amount of your monthly bills?
  • Do you have a retirement or registered pension plan?
  • Will you be inheriting any money?
  • How much instant cash do you want to have at your disposal for emergencies?
  • Whether you have a financial adviser or not, you need to be clear about those issues before formalizing your investment plan.

Investment Basics: All investments have three basic ingredients: Expected Return, Risk and Marketability.

Expected Return is the amount of interest, dividends or capital gains that you expect to earn from your investment. The higher the expected return, the greater the risk.

Risk is the chance you take that you could lose some or all of your investment, or that you could earn less return than you expected. Lower risk investments include government treasury bills and savings bonds. Higher risk investments are stocks and futures. Mutual funds vary widely in risk. Your tolerance for risk depends on your overall financial position, how much time you have to endure periodic fluctuations in your investments’ value, and how well you deal with the likely anxiety and stress you’ll feel if your portfolio takes a turn for the worse.

Marketability or liquidity refers to how quickly your investment can be converted to cash. Term deposits are not liquid, since you usually can’t withdraw your money before the end of the term. Mutual funds, however, are very liquid because you can quickly sell them on short notice for little cost.

Stocks – Buying shares or stocks in companies traded on the NYSE or NASDAQ have historically outperformed all other investments over the long term. You can make a killing and become wealthy by trading on the stock market. However, stocks can also bankrupt you if you don’t know what you’re doing, or even if you do. Playing the stock market is not for the feint of heart. The risk is great, but so is the return if you play it smart. The greatest factor in determining stock prices is the company’s earnings. Be prepared to watch your stock go up and down, fluctuating over hurricanes, gas prices, wars, and even presidential elections. It’s the long-term growth of the company that matters. Here’s an encouraging fact: since World War II, an estimated 90% of the stock market’s gain has come from profit growth. As profits accumulate, prices rise, regardless of what’s happened on any given day, month, or year.

U.S. Treasury Bonds – Do you want a sure thing? These are as close as you’re going to get because almost everyone agrees that the U.S. government is unlikely ever to default on its bonds. The government can always print more money to pay them off if necessary. As a result, the Treasury’s interest rate is considered a risk-free rate.

Mutual Funds – A fund is basically a corporation that collects and invests money. You join a pool by buying shares in the fund. Pooling your money together with other investors gives you more power to invest. Also, your money enjoys the advantage of being invested by a team of professional money managers who research bonds, stocks, and assets, placing the pool of money as smartly as possible. Investing your funds in several different places reduces your risk of being hurt by any single bad investment. The fund managers charge an annual fee from.5- 2.5% of assets, plus expenses. For that fee, you buy into the collective wisdom of a team of professional money people, along with attaining instant diversification.

Diversify Whatever you decide – to do it yourself, hire a professional, or go with mutual funds – you need to diversify – to place your money in several different investments. That will lessen your risk of being wiped out if things go badly for you.

It All Adds Up – Don’t postpone investing because you feel you haven’t enough money to make it worth your while. Here’s what investing only $100 a month adds up to in time at 8% interest:

- $12,000 invested over 10 years equals $18,294.

- $24,000 invested over 20 years equals $58,902.

- $36,000 invested over 30 years equals $149,035.

Wow. Now think what kind of money you can make if you double or triple your investment and if the interest rate is greater, such as with the return on savvy stock buys or mutual fund allocations. Do your homework, take the risk, and get in the game!