Is this the year you finally begin building your own investment portfolio? If you feel nervous about putting your money into the stock market, or aren’t sure how to get started, then this article by Lynda Claiborne is the perfect starter for you!
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. 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 Money Club at their local library. Susan, the Money Club 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, 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. (You can also find a lot of great information right here in WIFE’s Investing and Saving article archive.)
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 are likely to outperform bonds over the long term. Those closer to retirement may 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 appropriate 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. (Learn how to avoid Chicken Little Investing.)
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 this may result in a lower average cost 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, follow them to their financial adviser, and find out how their individual investment objectives resulted in different portfolios.
Note from WIFE: You can also improve your financial literacy and learn more about investing by starting a local Money Club in your area.