The ABCs of Investing
If you're considering investing, then you've already taken the crucial first step. Putting your money to work for you as soon as possible is key to financial success. One strategy that helps put time on your side is to reinvest the income from your investments. The more years you reinvest, the more your overall investment may benefit from the power of compounding over time.
Make goal-oriented plans
What do you do first when throwing a party or delivering a presentation? You probably pick the date you need to be ready and work backward to determine what you need to do. Smart investors do the same thing with their finances. They first think about what they are investing for and then figure out how much money they will need and how much time they have -- whether it's for a child's college tuition in 10 years, retirement in 25 years, or a parent's nursing home care in 5 years.
One strategy that takes into consideration various goals is asset allocation, splitting money among different investments. For example, retirement money can be invested in longer term, more aggressive growth investments like stock mutual funds, while you may want to keep assets you'll need sooner in shorter term, more conservative investments like bond or money market funds. Focusing on goals helps smart investors make sound investment decisions.
If you were constructing a table, you'd probably build it with more than one or two legs. Similarly, smart investors always make sure their portfolio is on solid footing. You shouldn't expect just one investment, say a hot stock tip from Uncle Frank or your 401(k), to help you meet all your goals. Your portfolio should be diversified across different types of investments and markets. Smart investors know that diversification allows them to pursue opportunity, while providing some insurance against heavy losses from any one.
Remember your plan
Smart investors always keep in mind the basic reasons behind why they chose to invest in the first place and stick to their overall plan. If you make a decision to buy or sell every time an economic index changes direction or the markets dip, your sanity is not the only thing you'll be risking. You also may face a bigger tax bill, create enormous recordkeeping hassles, and miss out on the benefits of consistent investing.
One strategy that highlights the advantages of staying on course with your plan is dollar-cost averaging. Investing the same amount on a consistent basis, such as every month or quarter, allows you to invest cost effectively -- buying fewer shares when prices are high and more when prices are low. Keep in mind that regular investing does not assure a profit or protect against loss in declining markets, and you should consider your ability to invest through periods of low prices.
Of course, you should always check and readjust your plan as time passes. Maybe you got a substantial raise last month. Why not invest that extra monthly income in your retirement plan or set up an automatic investment plan with a mutual fund? Smart investors recognize that successful plans help reach goals but also accommodate, and even make the most of, lifestyle changes.
Account for inflation and taxes
The costs of such basic goods and services as food, housing, and health care continue to rise due to inflation. In other words, the money you are able to save today won't buy as much down the road. In addition, much of your earnings go toward Social Security, property, state, and federal taxes. Smart investors realize that their investments need to earn enough to compensate for the large percentage eaten away by inflation and taxes over time.
Get professional advice
You shouldn't be afraid to ask for help. Even smart investors may need an investment professional to sort through the thousands of investment products offered today. It's an investment professional's full-time job: to keep up with the changing marketplace and to help you understand how particular products work and may fit into your investment plan. Smart investors don't have all the answers, but they do make sure they understand what they are buying before they invest.
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