The Investment Series: Investment Strategy Basics
Investment Strategy Basics (Go to the Investment Series for other Basics)
This is the sixth article in a series on investment basics. If you are new to investing, it is recommended that the articles be read in order. Prior articles introduce terminology that is used in later articles.
|Introduction||Strategy # 4 Diversify|
|Strategy #1 Have a Plan||Strategy # 5 Put Time on Your Side|
|Strategy # 2 Pay Your Future First||Did You Know?|
|Strategy # 3 Invest Regularly||Conclusion|
You can probably become a millionaire if you follow a few basic investment strategies. There is however a difference between investing and gambling. Only a small percentage of gamblers make money, most lose. Invest using these strategies and you should win.
Strategy # 1 Have a Plan
Investing is best done as part of a complete personal financial plan. Such a plan addresses not only the accumulation of money, but also the protection of income and assets. Although individual decisions vary widely, questions about life insurance, disability insurance, emergency cash reserves, and the like should be addressed, as well as the usual questions about planned expenditures and retirement goals. This is an area where professional advice can be of great value. A financial planning session can easily cost several hundred dollars. Some brokerages will include a financial plan as part of their service for investors above certain minimums. Some companies have also made arrangements to provide a financial planning session for employees. These arrangements are sometimes not well publicized within the company. So ask your Human Resources department before spending money for a planner or financial advisor. Even if you have to pay, in the long run, a good plan will pay for itself by both saving you more money and earning you more money.
Strategy # 2 Pay Your Future First
Does this situation sound familiar?
Instead of taking that familiar route, think of your future as another bill to be paid. Pay it up front instead of last. Making the "bill" for your future a priority is the way to improve your future financial picture dramatically.
Many, if not most, mutual funds can be set up for direct deposit either from your paycheck or checking account. This is a great way to make sure that you are paying your future first and investing regularly.
But that's not all. Many mutual funds also have a minimum investment to open an account. In many cases, the minimum up front investment will not be required if the 12 month sum of the direct deposit will exceed the minimum investment.
For example, assume a fund you like has a $1000 minimum investment. The $1000 minimum is more than you want to commit right now, but you would like to invest $100 per month. If you set up that $100 per month as a direct deposit to the fund, you do not need to pay the $1000 minimum to get into the fund..
Strategy # 3 Invest Regularly
The strategy "invest regularly" is often called "dollar cost averaging". It simply means that you invest a specified amount of money on a regular periodic basis. With this strategy you sometimes will buy high and sometimes buy low, but the theory is that -on average- you will buy OK. This strategy avoids the risk of trying to time the market and losing.
Strategy # 4 Diversify
Diversification reduces risk and helps to ensure long term growth. Mutual funds provide an excellent method for an investor to achieve diversification without a large investment. This is covered in the US Boomers article " Mutual Fund Basics".
Strategy # 5 Put Time on Your Side.
Time is one of the most powerful investment tools available. Time benefits you in two ways. One way is the power of compounding interest, dividends, and gains over time. This is illustrated dramatically in " The Amazing Power of Time", another US Boomers feature. The second is that time allows you to chose a portfolio more heavily weighted in stocks. Stocks, while riskier in the short term, have historically outperformed bonds and cash in the long term. Time is your ally. The sooner the better. Get your kids started early. Why wait?
That's it. Five simple strategies. But it still takes time. Most of us have been conditioned to work for our money, but have not been well conditioned to the idea that our money should also work for us. These strategies will make your money work for you, in addition to you working for your money. Imagine the feeling of seeing your investment earnings exceed your paycheck. With these strategies and enough time, it can become a reality.
Coming next: Annuity Basics
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