Now that you have a strong financial cornerstone set to build on your financial future, you are ready to start making investments. Investments should accomplish several goals for your, include both:
Long-term goals like investments for retirement, the down payment of a house five to ten years in the future and a college funds for the kids.
Short-term goals like preservation of capital while getting reasonable returns
Other investment might objectives include:
Higher returns while managing the risks of investing
Diversification of assets across different types of investments
For many investors following the ups and downs of the stock markets is actually less important that having an overall plan for your investments that is based on your individual tolerance for risks, the time horizon for the realization of the returns you seek and your goals for your family's wealth creation and or preservation.
The key to effective and successful investing lies in two basic elements of investing. First understanding your own investment needs and second, understanding the type of investment products that best fit those needs. If you have a family, one typical family event is the annual vacation. If requires planning, perhaps road maps and tour guides help you plan where to go and how to get there. It is the same thing with investing. Set your goals and then develop a plan for how to get there. If the family vacation is in the family car, you need a vehicle that matches the needs of your family; anything from a four-door compact to full size SUV might meet your needs. It is the same with investing, which financial product best fits your needs to reach the investment goals you have set.
Your values will also influence your choices. For example, you might have a family member who has died of a smoking related disease, so you don't want to invest in companies that promote or sell products related to tobacco. Today there is a range of investment products that will fit into what you value and still provide a decent return on your investment.
Investments have different features such as safety, liquidity; potential for growth, tax advantages and the amount of money you will need to get started. Just like picking out the right family car may require a bit of research, so does picking out the right investments.
Your investment choices must be made with an understanding of how your income, assets, tax status and long-term goals match the benefits and features of specific investment products. Once, you set your financial objectives the next step is to identify investments that will grow in value, produce an acceptable rate of return and be readily convertible to cash if the need arises.
The key to effective investing lies in a basic understanding of your financial needs and the types of investments that can best meet those needs.
Every investment has risks associated with it. We all have a degree of tolerance for taking on risk. In the short-term no one likes to take on the risk that they can lose everything in a day (well maybe day traders, but that is a topic for later in the book). So for most of us, we need to know the cash in the bank is save. To accept a zero risk tolerance on our bank deposits (checking and savings), we do two things, 1) we accept that checking will typically not pay an interest rate of return and 2) we look to the government to provide deposit insurance.
When we turn to other investment products we need to do an honest assessment of our risk tolerance and ask yourself what part of my investments am I willing to not have available to me. That could be, for example, a 20% unrealized market value depreciation (or' paper loss'), or it could be a 20% investment that became 'illiquid'. There is no place in the investment markets that you can hide from risk. If you invest, you take on risk, and if you invest according to a well-developed plan, you will be paid properly for the risk you do take. This is often referred to the risk vs. return ratio.
The "Investments: Risk vs. Return Ladder" diagram shows some of the different types of investments that you might be tempted to invest in. I recommend that you begin your investment program with safer investments such as savings accounts, money market funds, and mutual funds, before moving up the ladder to investments with greater risks (but potentially bigger returns).
To protect yourself, diversity among several investments so that risks are spread more evenly. In other words, your risks are reduced if some investments can absorb possible losses in others. The old adage-- "Don't put all your eggs in one basket" still applies.
Everyone wants to be wealthy, enjoying the life that financial security brings, but few of us really understand how to invest or how financial markets really work.
Figuring Out Wall Street is the simply guide you need to get a better understanding of how financial markets function and how to start investing.
The glossary of terms is extensive and it alone is worth to cost of the book.
You can get your copy here.