Investing hasn’t replaced baseball as the national pastime. But it’s increasingly a part of many people’s financial lives. More than 50% of all US households have money in mutual funds — up from just 6% in 1980. A similar percentage own stock either directly or through mutual funds or retirement plans.
Perhaps the greatest challenge in investing — whether you have lots of experience, you’ve just started, or you’re uncertain about how to begin — is finding the information you need to make financial decisions confidently. Among other things, that includes knowing how to choose what investments to buy, which ones to keep, and when to sell. The next challenge is translating your knowledge into action.
SAVE OR INVEST?
Investing isn’t the same as saving. When you save, you want to protect your assets and ensure that you’ll have enough money to cover financial emergencies. When you invest, your goals are more ambitious. You want to increase the value of your principal — the money you invest — or provide a source of income for the present or the future. In many cases, you may want to accomplish both goals. At the same time, investing means you have to be willing to accept risk, waiting out market downturns or facing the potential loss of some of your assets, to achieve the results you seek.
That’s not the case with insured bank accounts, which virtually eliminate risk to your principal, but provide little growth or income.
TAKE RESPONSIBILITY
The first step toward financial security is to recognize the financial responsibilities that you face now, and those you are likely to encounter in the years ahead. Then you need to educate yourself about investing. The more you know about selecting investments and building a portfolio, the easier managing your finances and reaching your financial goals will be.
CAN YOU AFFORD TO INVEST?
Many people who don’t invest think investing is only for rich people. This simply is not true. Some mutual funds allow you to invest as little as $50 at a time after an initial investment of $1,000 or more. Still, creating an investment plan can be intimidating. If you are having trouble getting started, you might want to consider the slow and steady approach. If you are earning $40,000 a year, for example, putting aside 5% of your income means just $5.50 a day. By the end of the year, you’ll have enough to invest $2,000 in an individual retirement account (IRA) or Coverdell education savings account — a sizable investment without much sacrifice.
And for $13.70 a day, you’ll put away enough to make the maximum IRA contribution for 2008, which is $5,000.
SET GOALS
Investing usually involves creating a financial plan and sticking to it. The plan can be a formal document or simply a list of things you wish to do in the future. But it must include the financial steps you’ll take to achieve them.
Some will be short-term goals, like buying a new car, making a down payment on a home, or starting a new business. Others are mid-term goals, like financing your children’s education, paying for extended travel, or purchasing a second home. Finally, there are long-term goals — most notably, planning for a comfortable retirement.
START NOW
There’s no perfect time to invest, but the sooner you start, the more time your assets have the potential to grow. Not only can you add money to your investment accounts for a longer period, but you can afford to take more financial risks, with the corresponding potential for larger returns. And you can ride out the inevitable downturns in the investment markets, giving your portfolio time to regain any lost value. But remember, it’s never too late to start investing either.
STICK WITH IT
While past results can’t guarantee what will happen in the future, stocks and the mutual funds that invest in stocks have provided stronger returns over the long term than cash or fixed-income investments. That’s been due to their potential to increase in value and to compounding, which occurs
when investment earnings — in this case stock dividends — are reinvested to produce a new base on which future earnings can accumulate. However, in contrast to fixed income investments, equity investments generally are more volatile and carry greater risks.
TAKE ADVANTAGE OF TAX-DEFERRED PLANS
If you’re putting money into an employer sponsored retirement plan, an IRA, or a tax-free educational savings plan, you’re already investing for the future in one of the most potentially productive ways you can. That contribution may be most, or even all, of what you feel you can put away.
Yet the truth is, being able to afford the kind of long-term security you want will depend, in most cases, on the personal investments you make in addition to the money you put into these plans. If you don’t start until your financial goals are within sight, it’s tough to invest enough to produce the income you’ll need. It’s also harder to weather the inevitable, cyclical downturns in the securities markets.
INVESTOR CONCERNS
Some people hesitate to invest in the stock market because they consider it too risky. Afraid of choosing the wrong stock or being battered in a bear market, they prefer to stick with investments they consider safe.
The problem with that approach, experts agree, is that by skipping stocks, investors are missing out on a potential source of long-term gains. While you could lose money in individual years or on a single stock, investors who have held a diversified portfolio of stocks through any 15-year period since 1926 have generally come out ahead.
Usually, the greater danger is not sticking with stocks. Investors who sell their shares when the market drops, rather than riding out the downturn, have been more likely to lose money than people who left their portfolios alone, or those who bought additional shares when prices were depressed.
When some investors choose a stock, they keep it through thick and thin, a strategy known as buy and hold. Other investors buy and sell regularly.
Their approach is to select stocks they think are going to increase in value. When the price goes up a certain percent — 15% to 20% is often typical though you can set your own guidelines — they sell and buy something else. Both approaches work, though it’s generally a good idea to decide which approach you have in mind for each investment you make.
