Thursday, October 23, 2014

Can Investing Actually Be Easy?

Most people have the perception that investing is complicated.  Making decisions about suitable investments, anticipating whether the markets are headed north or south, and then timing the sale to reap a profit can be overwhelming.   

Investors often hear common phrases such as:

“It’s not timing the market; it’s time in the market.”

“Buy low. Sell high.”

“Buy and hold”. 

Although there is truth in these messages, everyone’s investment strategies are different.  When considering appropriate investments for you, you want to take the appropriate steps.  Confucius, a philosopher, said, “What you hear, you forget. What you see, you remember. What you do, you understand.”  You need to arrive at the point where you understand investing; this will only happen when you take some interest in the process.

To help understand the world of investments, let’s follow a few basic steps.

 1st Step: Set the Ground Rules

Making choices about the appropriate investments clearly starts with identifying your goals, dreams, and aspirations.  This important step cannot be ignored.  For obvious reasons, your goals will dictate the appropriate investments to align within your time horizon.

2nd Step: Define the Time Lines

Knowing when you want to accomplish something for the purpose of investing is important if you want the money to be ready when you are.  Whether you are buying a new vehicle next year, planning your elaborate vacation in five years, or saving for retirement over thirty years, you must pace your investment strategy.  Gradually tucking money aside for each important activity is vital, so you are not cramming to save as the deadline looms closer.    

3rd Step: Select the Appropriate Investments

Diversify, diversify, diversify!  Don’t keep all your eggs in one basket!  How many times have you heard that phrase?

When you are starting to invest, you may not understand the world markets.  The terminology may be enough to either scare or intimidate you.  The word, “risk”, makes you want to run.  Yet if you think about different types of investments as food, investing is not so intimidating.  Here’s your menu:

Light Stuff = Salad

Medium Stuff = Vegetables and Potatoes

Heavy Stuff = Meat and Fish (food with more substance)

Now compare this menu to your present diet. Common sense says you should eat a balanced diet. That’s true.  Yet everyones’ likes are different.  You are unique.  You are not like your neighbor, your best friend, or any of your family members.  Therefore, you select your portion size based on your needs and health requirements.  This holds true for selecting your investments.

In the investment world as in your food world, your choices are the same: light, medium, and heavy stuff.

Deposit-Based investments (Light Stuff) consist of savings accounts, guaranteed investments, and money market funds.  These are your “liquid investments” or investments you can turn quickly into cash.  When you use these types of accounts, your intention is to ensure your money remains safe and the value does not fluctuate.

Income-Based investments (Medium Stuff) are also referred to as fixed income investments.  These investments can be fairly liquid because they are primarily invested in government and corporate bonds.  With income-based investments, you are lending your money to the government or a corporation who in turn pays you interest.  Although a loss on these investments is possible, the threat is minimal.     

Equity-Based investments (Heavy Stuff) involve ownership in publicly traded corporations.  You own a piece of these companies, either directly by purchasing common shares or indirectly through mutual fund investments. Your expectation is either to be paid dividends for your vested interest in companies or to have your investment increase in value. 
4th Step: Choose the Weighting to Match Your Investment Needs
Do you get queasy when markets fluctuate?  The ride experienced in the markets can be compared to the same ride experienced on a roller coaster: peaks and valleys, highs and lows, good and bad times! Your reaction provides a clear indication of how much risk you are willing to take with your money.  How well you handle the rise and fall in the value of any investment is a measurement of risk tolerance.  
Choosing the percentage allocated to each investment (or asset class) is matched closely with your risk tolerance.  Each investment type is gauged according to low, medium, or high risk. This in turn is linked closely to the rate of return earned at any given time in the market.  When you hear, “asset allocation,” this, in essence, is what you are doing.  You determine how much money you will allocate to bonds versus stocks. You determine your comfort level.
Remember the portions of your balanced diet are similar to the portions of your investments which are related to your saving purpose, time horizon, and risk tolerance. Some examples are:
  • You may choose to invest 100% in strictly deposit investments if your vehicle purchase occurs in a year.
  • You may choose to invest 25% in deposit investments and 75% in income investment for your trip to Hawaii occurring in five years.
  • You may choose to invest 20% in income investments and 80% in equity investments for your retirement occurring in thirty years.     

Understanding the different types of investors helps you recognize who you are so you can select the appropriate investment strategy; BUT remember you can be several investor types simply because you have different purposes for investing with different time horizons.  It’s like having multiple personalities, depending on the situation, yet you are still the same person.  
Here are some examples of investor types with respective allocations (estimated). Determine which aligns with your investment needs.  
Investor Type
Investor Description
Investment Allocation
Safe Investor
Very Conservative
100% Deposit Investments
Income Investor
  80% Income-20% Equity
Income-Growth Investor
Moderately Conservative
  60% Income-40% Equity
Balanced Investor
  40% Income-60% Equity
Growth Investor
Moderately Aggressive
  20% Income-80% Equity
High Growth Investor
Very Aggressive
100% Equity
Final Step: Payoff–Getting Your “Big Toe” Wet
Taking an active part in your investment strategy by understanding the different types of investments will help accomplish your dreams. 
  •      The dream retirement
  •      The dream vacation
  •      The dream vehicle
You need to ensure your investments are going to make your dreams a reality.  There’s two parts to growing your investments.
           ONE: The money you put into the investment account.
           TWO: The money you earn on the money you invest.
You do your part.  The markets will do theirs in helping you build wealth to fuel your dreams.

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