Five Steps To Building A Portfolio

What does financial freedom mean to you? For most people, it is living free from financial worry. We must invest today to build a secure tomorrow, but many people put off investing because they don’t know how to begin. But managing your investments does not have to be an onerous task, as you will find as we follow Anna and Mary and their progress towards financial freedom.

Anna and Mary met when they attended a “Suddenly Single” seminar at their local library. Susan, the seminar leader, presented five steps to follow on their way toward a secure future.

Step 1

Tell your money where to go, instead of wondering where it went

The first step to financial freedom is to gain control of your money. Develop a budget that includes saving at least 10% of your monthly income, and stick to it month after month. Soon saving will become a habit.

Step 2

Learn the Language of Investing

Susan advised Mary and Anna to read magazines such as Money, Worth, Smart Money, and Kiplinger’s Personal Finance. Reading “how to” books on investing and saving also adds to knowledge. Libraries provide a source for research on companies in Value Line and mutual funds in the Morningstar Reports.

Step 3

Understand Your Objectives & Risk Tolerance

Mary and Anna learned that stocks generally provide a better return than bonds, while bonds have lower risk.

Younger individuals may invest primarily in stocks, which outperform bonds over the long term. Those closer to retirement opt for more bonds to avoid stocks greater short-term market fluctuations.

Mary and Anna learned that their return and risk thresholds will dictate their own asset allocation, a mix of stocks and bonds to provide adequate return with less risk.

Step 4

Time in the Market Counts, Not Market Timing

Statistics show that trying to time the market, buying at the lows and selling at the highs, is difficult and even the pros fail. More important is being invested over the long term, holding stocks for at least three to five years.

Dollar cost averaging is also a good technique, investing a specific amount of money each month in a mutual fund. In some months you’ll buy high, in others low and it will balance out in the long term.

Step 5

Get the Advice You Need

Anna and Mary decided that seeking professional help made sense for them. They learned that financial planners typically charge a fee for their advice, while full service stock brokers charge commissions on securities purchased or sold. Discount brokers and on-line trading sites do not provide the advice and support that is so important to novice investors.

Mary and Anna left the seminar feeling more confident about their financial futures, knowing that five simple steps will lead them to financial freedom. Next month, we’ll follow them to their financial adviser, and find out how their individual investment objectives resulted in different portfolios.

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