One of my specialties is managing money. As I do so, if my client is interested in learning about the process, I teach them. I prefer inquisitive clients who love to learn. I talk to each of my clients at least monthly to review the moves I am making with their money, and to learn from them. Some of them enjoy managing their rainy day fund or a smaller account on their own.
No matter your job status, career or education level, investing is a great way to provide for your future financial requirements. However, if you go into investing without some basic knowledge, with greedy intentions or rush in too quickly, you’ll likely get undesirable results. Here are my favorite tips for ambitious investors.
- Learn the game. Browse these three books: Your Money and Your Brain, by Jason Zweig; The Elements of Investing, by Burton Malkiel and Charles Ellis; and Guide to the 50 Economic Indicators That Really Matter, by Simon Constable and Robert Wright.
- Know your limits & assess your confidence. Remember that beginners make mistakes. You are using your hard-earned dollars, so start small and take baby steps.
- Reflect on your goal(s). If you are saving for retirement, how long do you have to invest? Accumulating wealth requires steady contributions and remaining fully invested as long as possible. How much risk are you willing to take? How does that compare to the level of risk you can afford to take? These questions will help you determine the best asset allocation to meet your goal(s) and your risk tolerance.
- Choose a broker dealer/custodian with the necessary resources. For example, Charles Schwab has offices around the country and makes research available to retail investors. It also offers discounted fees for some mutual fund products. Check the amount of insurance your custodian offers in addition to that provided by the Securities Investor Protection Corporation.
- Subscribe to an independent research service. Morningstar and Value Line are two services that offer independent research on mutual funds and many stocks in easy-to-read formats. Neither company sells stocks, bonds, or mutual funds so they are not beholden to any particular company.
- Understand that security prices fluctuate. There are periodic corrections and bear markets. When stock prices decline dramatically, don’t panic and throw your investments overboard. Instead, consider what caused the decline. A financial crisis, an industry bubble burst, or a glut of oil drive down prices, but also create buying opportunities. Look to buy some of your favorite holdings on sale at large discounts.
- Distinguish between paper losses and steady streams of income. Value stocks pay dividends and outperform growth stocks over the long term, so if you want to own individual stocks, buy large cap value stocks. Unless industry conditions are really bad, the companies will continue sending you checks. Eventually, stock prices will recover.
- Ask about costs. Mutual funds charge investors fees to cover their expenses. Fees can range from one tenth of a percent to 5 percent or even more of your investment in that fund. Vanguard tends to have the lowest costs, so start there. Avoid funds that charge you to buy into their fund (front load) or get out (back end load).
- Make deposits regularly. Invest 20 to 30 percent of your income and live on the remainder. If your company offers a defined contribution plan and will contribute a certain amount, be sure to participate fully.
- Review and reset your allocations annually. When you receive your monthly or quarterly statements from your custodian, review the Morningstar and Value Line ratings of your holdings and make adjustments to your asset allocation mix.
Above all, be patient and continue to study the investing game. Avoid event-driven, investment-oriented television shows. They are better at entertaining you than helping you prosper. Instead, reread the books mentioned in tip #1 and other investment classics. Browse your Morningstar and Value Line reports. Read the Economist, the Wall Street Journal, and Barron’s on weekends to stay abreast of industry changes. Most importantly, have fun and keep a steady hand.
If you decide that managing your money isn’t for you, contact me. I’ll help you figure out the best approach for you given your unique situation.