Monday, 24 October 2011

Money Saving Monday - Principles of Investing

Begin Investing Now
Do not procrastinate. Begin now because an early start can make all the difference. An early start provides a long time horizon for compounding to show its true benefit for the investor.

Know Yourself
Current situation: What is your current net worth, monthly income and expenses? Where can you reduce your expenses? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns?

Your Financial Goals: What are they? How much will you need to achieve them? Are you on the right track?

Risk Tolerance level: How much risk are you willing and able to accept? Risk tolerance is determined by your personality, age, job security, health, net worth, emergency fund, and the length of your investing horizon.

Sort Out your Finances
Before you even think about investing, know where your money goes each month. Track your spending habits. If you're carrying debt at a high rate of interest, especially credit card debt, you should unburden yourself before you begin investing. Amass enough to cover three to six months of expenses for emergencies.

Never invest in anything you don't understand.

Invest Long Term
Invest for the long term. Do not be influenced by short-term fluctuations. These are inevitable as all economies as well as businesses experience the boom and bust cycle. Don't try to time the market. Get in and stay in. Review your plan periodically, and whenever your needs or circumstances change. If you are not confident that your plan makes sense, talk to an investment advisor or someone you trust.

Investing in Stocks and Mutual Funds
A long term view helps you to safely invest in 'riskier' investments, such as stocks, which the market rewards in general. This requires patience and discipline, but it increases returns. This approach reduces your choices to two: stocks and stock mutual funds. In the long run, they're the winners. The additional risk is worth it due to the power of compounding. 10% a year for 20 years is 570%, but 7% a year for 20 years is only 280%.

Arm yourself with knowledge.
Always do your homework. Knowledge is power. Understand personal finance matters that could affect you. Understand your current investments and the risks associated with them. Be cautious when evaluating the advice of anyone with a vested interest.

If you're going to invest in stocks, research companies until you understand them. Consider joining an investment club. Examine historical data or participate in a stock market simulation. If you don't have the time, consider mutual funds, especially index funds.

Get Help If You Need It
The do-it-yourself approach may not be suitable for everyone. If you try it and it's not working, or you're afraid to try it at all, or you don't have the time or desire, then you should seek professional assistance.

If you want others to handle your financial affairs for you, remain involved to some degree, to make sure your money is being spent wisely.

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