To the new investor investing money looks complicated. It is my viewpoint that there are two investment basics you need to know to make sense of things when you start investing. Investing money CAN be simplified.
Investment basics #1: There are 5 things you must consider when investing money. Investment basics #2: There are only 4 different types of investments in the world.
The 5 things you must consider are called investment characteristics. You can rate investments to see if they fit your needs in terms of: liquidity, safety, growth, income, and tax treatment. For example, let’s say you are single with a good job, money in the bank, and a modest mortgage. Your goal is investing money for retirement.
Your 4 basic investment options starting with the safest: cash equivalents & savings products, bonds, stocks, and alternative investments (like real estate, gold, and foreign securities). That’s it. All investments can be placed into one of these categories. You want to start investing money to make it grow for retirement; and at this point you have all of it safely making miserly interest in bank savings accounts, paying income taxes on what interest you earn.
As a new investor you have been investing money as follows in regard to investment basics #1: high liquidity, high safety, no real growth, small income, with no tax breaks. This means that you have easy access to your money without penalties, have very little if any risk of loss, are making small returns, are receiving income you don’t really need, and are paying income taxes as you go.
Looking at investment basics #2: all of your money is in the first category. You need to start investing in bonds to earn more interest or income. Then start investing in stocks and alternative investments for growth and higher returns. Consider your 401k at work and/or an IRA to get tax advantages.
The new investor can not hope to master the challenge of investing money overnight, but now you have some real investment basics under your belt. Learn all you can about bonds, stocks, and alternative investments as well as cash equivalents or money market securities. Then concentrate on learning and implementing a sound investing strategy.
Once you have a firm grasp of the basics, the rest of the pieces of the puzzle will be easier to fit together. I know this because I started investing with an MBA under my belt as a new stock broker. I was well versed on stocks, bonds and other securities; but it took me years to put the big picture together. I was trained to sell investments. The rest I learned through mistakes and self-study.
We’re all a new investor at one time or another. Do your homework and read all you can about investing money. That beats the heck out of learning through expensive mistakes.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals. Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.