In our continuing efforts to help you make the most of your money, the following is a guest post about investing. I am by no means an expert in this field, so I asked someone to help all of you by sharing her knowledge!
We all want the best for our families, we want them to be happy, healthy and experience as much life as possible. Part of providing your family with the best possible life is by saving for the future; because of this you are ready to start investing.
One problem though since you don’t want to lose your hard earned money you are not sure what to invest in to ensure it is there when you need it. Not to mention you may be confused about where to even start investing! First let’s take a look at what exactly you should consider for your first investments, then let’s take a look at how you can get started investing today!
What Investments Should I Consider?
When you first start investing there seems like so many options that are available for your money; stocks, bonds, real estate, commodities and cash. However there really are only a couple investments that make sense when you are first starting to invest.
When you are first starting you should focus on stocks and bonds. This combination will smooth out the ups and downs of the market enough that you won’t want to jump out of the market and create a loss. At the same time you won’t be taking unnecessary risk from commodities. Adding other asset classes such as commodities is not necessary for diversification until you have a larger nest egg and have a better understanding of investing.
Should I Buy Individual Stocks and Bonds or Mutual Funds?
The key to not having to say “I lost it all in the tech bubble” or any other bubble is to make sure that you have invested in many different stocks and bonds. When you are only in a couple of stocks or bonds you don’t have a diversified portfolio and you can end up losing a lot if your one or two stocks are a bad choice.
The best way to overcome this lack of diversity is by using mutual funds. A mutual fund invests in multiple stocks and/or bonds thus giving you instant diversification. Plus with mutual funds you don’t have to spend as much time managing your investments, so you can build saving for your family while actually getting to enjoy time with them.
What Types of Mutual Funds Should I Buy?
When you start investing you will want a mix of stocks and bonds, this is call asset allocation (Asset allocation chart for you to pick your mix). You can achieve this mix in a few different ways. They include:
- Investing in a Target Date Fund – these are designed to give you a good asset allocation specific for the timeframe that you have left to invest. You select the year you want to retire and it adjusts the allocation as you get older. The draw back with these funds is that they are all very different in their approaches and many contain investments you might not want to invest in. You need to look at each one in detail to see what they include.
- You could split your available funds to invest into a stock fund and a bond fund. Let’s say you have $100, you might put $25 into a bond fund and $75 into a stock fund. Placing these investments into index funds will track the market so you can gain a wide range of different investments without needing to worry about selecting the right manager. For example you could select a Total market index which invests in small, medium and large companies plus a bond index funds. This will give you both diversification and a good asset allocation.
- Begin your investing in a 401K. This will allow you to put smaller amounts of money into funds, because there are no minimums just percentages of salary and an allocation. Plus it is easy to get started – just call HR!
Where to Go to Start an Investment Account
If you are not using your 401K you can do the following. The best way to get investing right away is to select a brokerage company such as Vanguard or Fidelity that carries a full line of target date funds or index funds.
Once you have selected the right company then you typically can sign up using their online applications, or you can download the forms online and then send them in. Once you fill out the forms and get the funds sent in you are up and running with investing!
- If you want more help with selecting your investments most brokerage companies have someone who can help. Just give them a call!
- When looking at index funds the most important thing to look at is fees. The fees will eat away your investment, so the lower the better. With index funds you want to be below .5%, and even that is high.
- Many firms will waive the initial deposit if you set up automatic monthly investments. This is where they take a set amount out of your account each month to go into the investment. Just call and ask if they do this!
Congratulations, you just started taking care of your family in one more way by investing for your future!
Andrea Travillian runs Take A Smart Step a site dedicated to personal development, including personal finance, health, career and relationships.