Investing your money can be a great way to ensure your financial future. With the right investment choices, you can be sure to have money for emergencies, put it towards your children’s education, and have it available when the time comes for you to retire. However, a keyword in the preceding phrase is “right.” If you make the wrong investment choices, you may end up where you started, or flat broke. Most people who invest wisely by making the right decisions with their money follow the same basic investment pattern, although they may define it by another name. It might be that you are the cynical type who chooses to believe that the basic rules could not possibly be as easy as they seem in an area that seems so complex. However, these rules have indeed withstood the test of time.
First Rule:
First of all, make sure that the money you choose to invest is indeed earmarked for the purpose. As in any form of gambling, nothing is to be gained, and everything is lost when investing. Do not put up money you cannot afford to lose should the market take a downturn. If you read my posts often, you know I am not promoting any form of trading but believe in long-term investing. That is, buying good companies at a discount with your calculated margin of profit to reduce the investment’s overall risk. If you are interested in a previous post on starting investing, click HERE.
Second Rule:
One rule that people seem to refuse to apply in any area of their lives, including the world of investing, is lean not on your understanding. Most of the time, this results from people balking at entrusting another person with their money, believing that they can work the market themselves with a little understanding. This reasoning is fundamentally flawed. In the first place, most people will not be able to begin to unravel the complicated graphs, pie charts, and statistics by which the investment world relates its information. To understand the numbers, you need to have some basic training. There may come a time after you have had some experience in the market that you will be able to make sound decisions on your own, but the initial get-your-feet-wet phase is not the time to attempt it. Check the background of the advisor you choose, as there are a lot of brokers out there looking for a short fleece. The best brokers will have years of experience and various investment backgrounds and will probably cost you much less than you might think. Seek out a fee-only Registered Financial Consultant (RFC) near you and see if their style is a good fit for your needs. And if you forgo hiring an RFC, open an online brokerage account and invest in an index mutual fund or exchange-traded fund (ETF). For some additional information on ETFs, visit HERE.
Fourth Rule:
Think long-term. Unless you invest millions of dollars initially, it will take time for your investments to mature and accumulate substantial gains. The best investments are proven over time, and thus it is best to place your funds in long-term choices. The details of this are plain- it is best to forget about this money in terms of a cash fallback, at least for several years.
Fifth Rule:
Diversification is an oft-flogged truism of the investment world. A good portfolio will include cash and cash equivalents, think bonds, growth investments or equities, and growth and income investments such as mutual funds or ETFs. Diversification ensures that you do not have all your eggs in one basket should any part of the market experience a downturn. Note that diversification means investing in several areas and ensuring that no one area contains a disproportionate percentage of your funds.
It would help if you remembered this, the markets are volatile by nature, and you do not have any losses until you sell, thereby locking in that loss. You have no losses if you wait for the market to rebound and not sell. When the markets go down, losses are only on paper, and selling at depressed prices locks in those losses. Then people tend to re-enter that market at much higher prices, resulting in fewer shares than you had previously.
If you need help or any assistance, feel free to contact me directly if you are in or near the Metro-Nashville area or comfortable working in a virtual environment. Those outside middle Tennessee seek out a qualified fee-only Registered Financial Consultant near you.