9:22 AM
Kholid Al Fakhry
Understand the difference between saving and investing
Saving is for smaller, near-term goals, such as the next family vacation, a car or a financial emergency. Investing is for larger, long-term goals—at least five years away — such as retirement or college. Savings are best kept in cash or money market accounts, basically low risk accounts. Investments on the other hand carry the risk of loss of principal but can provide higher returns.
Put the rest of your financial house in order first
Before investing, consider tackling several other household financial issues. Create a budget, or spending plan, in order to free up money for regular investing. Pay off expensive credit cards or other high-interest consumer debt that eat up valuable investment dollars. Build an emergency fund that includes three to six months of living expenses and buy the right kinds and amount of insurance to protect against a financial setback—otherwise, you may be forced to raid your investment accounts for cash at a time when the market is down or with costly tax consequences.
Clarify your goals
Smart investing means investing with a specific purpose— those life goals such as your desired retirement lifestyle or passing money on to heirs. Investing with purpose makes it easier to stick to your investment plan and to invest income you might otherwise spend.
Don’t just grab for the highest return
One of the most misunderstood aspects of investing is the belief that investing is all about seeking the highest possible returns. Personal investment is more about making informed, realistic investment decisions designed to accomplish your financial goals without taking unnecessary risks.
Understand your own risk tolerance
If some investments are going to keep you awake at night, no matter how good they are, they are not the right investments for you.
Educate yourself about personal investments and investing
Even if you work with a financial planner or other investment professionals, you need to have a solid understanding of how different types of investments work, their potential returns, their risks and how you can assemble them into a cohesive portfolio that’s right for your needs and goals. No one cares about your money more than you.
Hold realistic market expectations
Understand what “average” returns are. You might not see this average return every single year. Understanding averages will help you understand the fluctuations and keep going when there is a down market.
Follow a detailed written plan
Formally, this is called a personal investment policy statement. It’s a road map to keep you on course through good times and bad, to eliminate investment ideas that don’t fit your circumstances and to provide a way to monitor the actual performance of your investments.
Allocate investments according to personal goals and needs
The sooner you’ll need the funds, usually the more conservative your investments should be.
Diversify your investments
Very important investment guideline – don’t put all your eggs in one basket. When stocks are performing badly it is time for bonds and vice versa. So diversify.
Don’t overload on company stock
Very similar to #10. Don’t just rely on one company. If it is the company you work for, you not only have the chance of losing your job when the company does badly but also all your personal investments as well. Diversify.
Don’t chase ‘hot’ performance
Investing is unpredictable, what is “hot” today might be down in the dumps tomorrow. Don’t chase the stock of the day. In all probability if you heard about the hot stock in the TV or paper, it might already be at it’s peak price point.
Don’t ignore ‘cool’ performance
This is the opposite of chasing hot performance. Take a note of what is surviving the down market as well. The best way to handle #12 and #13 is to invest in a diversified portfolio and rebalance it according to your goals and timelines.
Stay in the market
One of the big mistakes people do is to invest in stocks when the market is doing well and pull out during a bear market. It is buying high selling low. If you understand your risk and invest based on when you need the money, you can sleep well at night and stay in the market. It will average out.
Start investing early
Power of compounding is one of the basic personal finance principles that works miracles. The earlier you start, the more time for the money to grow and work for you.
Invest regularly and automatically
You can’t predict the market. The only way to win is investing regularly and automatically so that you can take advantage of dollar cost averaging.
Pay attention to investment expenses
You can’t control the market but you can control the expenses. Low cost index funds are most of the time the best personal investment for the little guys.
Don’t let taxes dictate
Investing in a tax sheltered account is the best way to save. But don’t let the tax dictate your whole personal investment strategy. For example, if a stock is doing very well, you shouldn’t refrain from selling it “only” because you are not a fan of the capital gain tax. If you wait, the stock might tumble. Think about taxes, but don’t let it control your investment decisions.
Rebalance your portfolio
Unless you are invested in one of the target retirement funds that does the rebalancing for you, it is recommended that you rebalance your portfolio at least once a year. The asset mix will depend on you needs, age and period of investing.
Monitor and revise your personal investment plan
As with any financial plan, you should revisit your personal investment plan at least once a year. You will want to see if you are actually following the guidelines you outlined in that plan and also to revise the personal investment plan if your life situation or your risk level has changed.
There it is. I am trying to learn as much as I can about investing, so you might see more basic investment articles here as I learn the ropes. For the more experienced investors out there, what is your favorite personal investment tip? Also which book will you recommend for a novice like me?
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