Basics
How Much Money Do You Need To Start Investing ?
Friday, August 3rd, 2007That’s always the question.
Often we are looking at this for the first time because our lives have started to even out, bills are getting paid regularly and maintenance has become a standard task rather than an emergency threat. After all the smoke has cleared, we see that there actually is some money left over that could be doing something good for us, instead of just sitting around waiting for the next impulse buy.
There are mutual funds which will let you open an account for as little as $100. So you can start very small and begin to build from there. Diversification is a strategy for investments, so you could put your money in several different funds with good performing potential.
Online stock trading now brings you much closer to investment opportunities as well. It used to be that you needed a broker and to purchase stocks in blocks, investing at least $1,000. Now you can purchase single shares. However, as we will talk about in another topic, with the fees and taxes involved we need to be careful about purchasing small amounts of stock, simply because the fees involve erode away our investments rather than building them up.
Next, let’s see how we can prepare ourselves and keep the worry down as we get ready to invest…
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Begin At The End
Thursday, August 2nd, 2007How do we work out our investment plan ?
Like every great mystery writer, the best way is start at the end and work your way backwards. That’s why the goals and objectives which you defined earlier will help you to reverse-engineer and formulate a plan - what do you need to do specifically in order to achieve the goals ?
Start with your retirement plan and work back to your day-to-day needs. Your current liquidity is of course the primary need. Look at your current expenditure and income, and estimate what cash flow you require to maintain for comfortable living. After we have carved out a comfort zone for your primary liquidity needs, retirement plans are the best place to start, for several reasons.
Firstly, investments setup for retirement are often protected from situations like bankruptcy and lawsuits. Secondly, there are often good tax advantages associated with retirement plans, such as 401(k) plans, deductible and Roth IRAs, Keoghs and SEPs.
Young investors may be a little skeptical about taking from their pool of available investment funds for long term retirement investments. However the more you have provided in your retirement nest, the better you will feel about your other high risk/high yield investments. And that will go a long way in upkeeping a healthy psychology which is an important part of making good investment decisions.
Let’s now see how much money you need to start investing…
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The 4 Pillars of Investing
Wednesday, August 1st, 2007Investing is never a stagnate path. It is always changing as our needs and circumstances change.
How we choose our investing options is very much dependent on our big picture vision of what we want in terms of our financial and personal goals. If we can define our target outcome clearly, then we can formulate our investing strategy and take the right options to get us there. This will ensure a much better chance of achieving our target, compared to the haphazard way of grabbing whatever “hot” that comes our way.
Our big picture vision can be defined by four considerations - Liquidity Needs, Goals and Objectives, Time Horizon and Risk Profile.
Liquidity Needs
Liquidity means the ability to convert an asset to cash quickly. You want to keep an amount of cash or liquid asset (which you can quickly convert into cash) for daily or short-term needs, as well as for emergencies. You don’t want to tie up all your cash in non-liquid investments because you’ll be in a fix if there is an emergency and you need the cash which you can’t withdraw.
Goals and Objectives
You also need to examine what are your goals and objectives for investing. Do you have a specific goal in mind, such as a house, or retirement ? Be specific in defining your goal. It’s not enough to say “I want to invest to have enough money for retirement”. How much is enough ? $50,000 ? $100,000 ? Having a clear and specific quantifiable goal will help you to pin point the type of investment instruments you are going to use.
Time Horizon
How much time are you allowing your investments to grow to reach your goal ? How long are you willing to wait to see your returns ? 5 years ? 10 years ? 20 years ? Perhaps you plan to get married and buy a house in 5 years’ time. Or maybe you are investing for your retirement in 20 years’ time. The time period you allow your investments to grow will determine the type of investment options you take, because of the different risks involved and the initial investment sum required.
Risk Profile
What kind of risk are you able to tolerate ? Can you sleep at night knowing that you have put your money in an instrument which will give you high returns but with a high probability of losing it all ? Or can you only have mental peace when you know you have put your money where there is very little risk of losing but low rate of return ?
Does this mean that investing is risky ? Investing is risky when we do not have the proper education and skills. What we want to achieve here is to raise our level of competency as an investor in knowledge and skill, so that we can minimise the risk and achieve high returns with each dollar we invest.
Putting the four pillars together
These four considerations are essential to finding the types of investments we want to use from the long list of available markets and paths out there today. Answering these four areas makes the path fairly obvious.
Now we are ready to progress further. Let’s begin at the end…
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