Personal Financial Planning:An "How-To" Guide (part 40)

THE OBJECTIVES AND REWARDS OF INVESTING

by

Charles Lamson

People invest their money for all sorts of reasons. Some do it as a way to accumulate the down payment on a new home; others do it as a way to supplement their income; still others invest to build up a nest egg for retirement. Actually, the term investment means different things to different people. That is, while millions of people invest regularly in securities like stocks, bonds, and mutual funds, others speculate in commodities or options. Investing is generally considered to take more of a long-term perspective and is viewed as a process of purchasing securities wherein stability of value and level of return are somewhat predictable. Speculating, on the other hand, is viewed as a short-term activity that involves the buying and selling of securities in which future value and expected return are highly uncertain. Obviously, speculation is far more risky than investing.

If you are like most investors, at first you will probably keep your funds in some form of savings vehicle. Once you have sufficient savings---for emergencies and other purposes---you can begin to build up a pool of investable capital. This often means making sacrifices and doing what you can to live within your budget. Granted, it is far easier to spend money than to save it, but if you are really serious about getting into investments, you are going to have to accumulate the necessary capital! In addition to a savings and capital accumulation program, it is also important to have adequate insurance coverage to provide protection against the unexpected. For our purposes here, we will assume you are adequately insured and that the cost of insurance coverage is built into your family's monthly cash budget. Ample insurance and liquidity (cash and savings) with which to meet life's emergencies are two investment prerequisites that are absolutely essential for the development of a successful investment program. Once these conditions are met, you are ready to start investing.

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But How Do I Get Started?

Contrary to what you may believe, there is really nothing magical about the topic of investments---in fact, as long as you have the capital to do so, it is really quite easy to get started in investing. The terminology may seem baffling at times and some of the procedures and techniques quite complicated. But do not let that mislead you into thinking there is no room for the small, individual investor. Nothing could be farther from the truth! For individual investors have a wide array of securities and investment vehicles to choose from. Further, opening an investment account is no more difficult than opening a checking account.

How, then, do you get started? To begin with, you need some money---not a lot; $500 to $1,000 will do, although $4,000 or $5,000 would be better (and remember, this is investment capital we are talking about here---money you have accumulated above and beyond any basic emergency savings). In addition to money, you need knowledge and know-how. You should never invest in something you are not sure about---that is the quickest way to lose money. Learn as much as you can about the market, different types of securities, and various trading strategies. Taking a course on personal finance is a good start, but you may want to do more. For one thing, you can become a regular reader of publications such as Money, The Wall Street Journal, Barron's, and Forbes. Also, try to stay current with major developments as they occur in the market; start following the stock market, interest rates, and developments in the bond market.

Gitman & Joehnk, writers of Personal Financial Planning, on page 435, strongly suggest that, after you have learned a few things about stocks and bonds, you set up a portfolio of securities on paper and make paper trades in and out of your portfolio, for 6 months to a year, to get a feel for what it is like to make (and lose) money in the market. Start out with an imaginary sum of, say, $50,000 (as long as you are going to dream, you might as well make it worthwhile). Then keep track of the stocks and bonds you hold, record the number of shares bought and sold, dividend received, and so on. Throughout this exercise, be sure to use actual prices and keep it as realistic as possible. You might want to use one of the portfolio tracking programs offered at such Web sites as www.quicken.com or www.moneycentral.msn.com; there are some powerful Internet sites out there that make it very easy to track the behavior of a portfolio of securities. The advantage to creating a paper portfolio is clear. If you are going to make mistakes in the market, you are much better off doing so on paper. Also, if your, parents, relatives, or friends have done a lot of investing, talk to them! Find out what they have to say about investing, pick up some pointers, and possibly even learn from their mistakes. Eventually, you will gain a familiarity with the market and become comfortable with the way things are done there. When that happens, you will be ready to take the plunge.

At that point, you will also need a way to invest---more specifically, a broker and some investment vehicle in which to invest. The stockbroker is the party through whom you will be buying and selling stocks, bonds, and other securities. If your relatives or friends have a broker they like and trust, have them introduce you to him or her. Alternatively, visit several of the brokerage firms in your community; talk to one of their brokers about your available investment funds and your investment objectives.

As a beginning investor with limited funds, it is probably best to confine your investment activity to the basics. Stick to stocks, bonds, and mutual funds. Avoid getting fancy, and certainly do not try to make a killing each and every time you invest---that will only lead to frustration, disappointment, and very possibly, heavy losses. Further, be patient! Do not expect the price of the stock to double overnight, and do not panic when things fail to work out as expected in the short run (after all, security prices do occasionally go down). Finally, remember that you do not need spectacular returns in order to make a lot of money in the market. Instead, be consistent and let the concept of compound interest work for you. Do that and you will find that just $2,000 a year invested at the fairly conservative rate of 10 percent will grow to well over $100,000 in 20 years! While the type of security in which you invest is a highly personal decision, you might want to give serious consideration to some sort of mutual fund as your first investment. Mutual funds provide professional management and diversification that individual investors---especially those with limited resources---can rarely obtain on their own.

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*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS 434-435*

end

smart.sites

With so many investing Web sites, how can you find what you need? Start with An Opinionated Guide to the Web’s Best Investing Sites, www.winninginvesting.com, for links to useful Web sites listed by category. An added benefit: most are free.

smart.sites

Zacks Investment Research (www.zacks.com) offers a comprehensive “Investing 101” tutorial and a glossary of financial terms.