Investments are an important part of your life – whether you are single or married, working or not working. Making good, solid investments allows you to reach your financial goals and provide confidences in times of emergencies or major change.
There is a lot of information available telling you how and where to invest; unfortunately, it can be a bit overwhelming. We will take a look at the five basic strategies to consider when making any type of investment with your money.
Step 1: Establish Financial Goals
The first step in investing is to establish financial goals. You should ask yourself the following questions:
- Where do you see yourself in one year? Five years? 10 years?
- Do you need to save money for your children’s education?
- Do you need to save money for your retirement?
There are many different investment options available in the market for whatever goal you have established for your future. How and where you invest will be determined by your age, your tolerance for risk and your investment priorities. For example, if you are within five years of retirement, you may want to place your money in a lower-risk investment, such as bonds or certificates of deposit.
Step 2: Establish a Financial Plan
After determining your financial goals, you must decide whether or not you feel confident navigating the investment waters on your own, or hiring a professional financial advisor or full-service brokerage firm to assist you. If you plan to hire a professional advisor or firm to help, you will pay more money in the long-run. If you want to manage your own money, be prepared to invest a lot of time in monitoring your investments on a regular basis.
Step 3: Explore Your Options
Explore Your Options. Even if you decide to have someone else manage your money, it is still important that you have an understanding the various types of investments available in the market today. Some of the most basic options include:
- Traditional savings accounts. Traditional savings accounts include basic savings accounts, money market accounts and certificates of deposits. In most instances, they are insured by a federal agency. They generally do not offer high rates of return; however, they are the ideal option for short-term investments.
- Stocks and bonds. Stocks are shares sold by individual companies. Bonds are loans made by investors to governments and corporations. Bonds are safer than stocks, but stocks have a higher rate of return than bonds. Mutual funds are a good way to spread out your risk as they allow you to buy into pools of stocks and bonds. Furthermore, if your employer offers a matching 401k plan, be sure to take advantage of the free money; these plans usually invest in stocks, bonds and other investments and can save you a lot of money on taxes.
- Real estate. Investing in real estate is generally best as a medium- to long-term investment practice. Appraised values of real estate appreciate over time, and in some markets, it may take longer than others.
Step 4: Diversify Your Investments
Diversify Your Investments. It is imperative that you do not put “all your eggs into one basket” when it comes to your investments. All investments have a level of risk associated with them; however, you can limit your risk by placing money in various types of investments. The key is to invest based on your financial goals and allocate the appropriate percentage of your money to the appropriate investment. For example, if you are saving for retirement and you are in your mid-20’s or mid-30’s, you may want to invest a larger percentage of your money in stocks and bonds over traditional savings tools because your rate of return will be larger over a longer period of time.
Because the market fluctuates, you can usually make up any differences in the market from year to year. However, if you are looking for security over quick profits, you may want to invest a larger portion of your portfolio into traditional savings accounts, or even into bonds.
Step 5: Review Your Portfolio
Review Your Portfolio. Every six months to a year you should review your overall financial plan to be sure you are on track with your goals. Furthermore, as your portfolio grows, you will find that certain funds are larger than others, and you should adjust such imbalances to your investments. Or, you may have situations arise in your life that require a different approach to your financial future. Whatever the case may be, regular review of your portfolio will help you reach your financial goals.
Investing is not a “one size fits all” proposition; it requires constant care. However, if you follow the five steps we have outlined, you will “more than likely” be able to reach your long-term financial goals.