Beginning Investing - what you need to know about the Game
Maybe it isn't your idea of fun; but investing, sure is mine. When I survey my little financial empire with stocks here and investments there, it gives me a sense of empowerment; I need to keep changing things, tearing down and rebuilding, looking for ways to learn. My idea of a great time shopping would be to weigh and size up the various investment options out there, and getting my investment instincts a good workout. When I see my predictions play out as I plan, it gives me a thrill; when they totter and fail, I want to sit down and study things deeply to see where my experiments went wrong. If that takes me out of the running for any kind of hipness, there are other things that go with my part too - glasses and my tendency to quote Freud. But I don't care, because investing is so much fun. But guess what, there is then a survey that finds that of all people under 25, one out of three feels the way I do. Maybe I'm younger than I thought I was. To anyone beginning investing as a fun hobby, now is a great time to be alive.
What is not fun in playing the markets? Beginning investing at my mother's insistence, I thought I'd start out at 22 with a 401(k). Investing really didn't grab me at the time, and I decided to put everything in a treasury bond mutual fund. I didn't really look at it for another year; in the end, I found it made barely anything more than 1% every quarter. I was dismayed; even if I wasn't interested in it, I did want to do well, whatever I did. I found a nice financial magazine that had a Cosmo style quiz about how to find out where my investing soul lay. At the end of the quiz, I thought I knew what to do; I picked up a list of possible fund options, and before I knew it, I was making 6% a quarter. So when I tell you something about what I learned in my years beginning investing, it is so that you can have as much fun as I did.
The first thing you need to do before you decide on your investing plan is to find out how much you can scrape together to use as your investing capital. Before indulging in the luxury of investing, your first order of of business should be mustering all your resources to set up enough of an emergency fund to see you through at least six months of no income. You need to first set aside enough for all your monthly expenses and an emergency fund before you'll be able to find out how much money you can set aside each month to engage your inner Gordon Gekko to make a beginning investing.
Of course, you won't have that much at first; but you need to do it right. Your next step is to find out how much you can afford to lose - your tolerance to risk. The longer the period of time you give yourself to see the returns you expect, the higher your tolerance for risk. For instance, if your plan involves having your investments gain a certain amount by the end of the year, that's not a lot of time to recover from any losses you might make on the way. For this reason, you have to play very safe. The longer the period of time you give yourself to make your goal, the more risky your investments can be, and therefore the more rewarding.
Once you have all the preliminaries in place, you can start actually seeing your portfolio take shape. Do you need to choose stocks or bonds; should they be large caps or small caps; how about foreign companies versus homegrown? It would be a good thing to diversify. If your plan involves waiting 10 years to see your plans come to fruition, stocks can't be beat. Large companies over the last 50 years for instance, have gained 10% annualized. Small companies have risen even higher than that. On average, you should be able to get 8%, planning conservatively. It wouldn't be a bad thing if you went all out on the stocks and ignored the bonds altogether if you had years over which to wait and watch. But if you're feeling adventurous, experts believe that it wouldn't be a bad idea if you mixed in perhaps 25% in alternatives like bonds or commodities.
Of course when you're beginning investing, you can't go out and pick your stocks yourself; your best bet would be to go with mutual funds that deal in stocks or commodities as you choose. Look for mutual funds that have a great strong management team. For the long-term right now, Vanguard and T. Rowe happened to be great picks. If you start with a 401(k), that should set you up on the right path; and taking an employer-sponsored account would keep your choices of stock picks to a minimum, and simplify your life. You need to keep monitoring how your investments are doing; try the instant X-ray tool on MorningStar.com. To anyone beginning investing, it's tempting to be hypersensitive to every movement in stock prices. You could easily wipe out your earnings that way though, paying fees for each investment shift you make. Invest wisely, and be patient then; you should see your hard work pay off.