Are you getting sick and tired of working? Want more time to spend with family and friends or just to enjoy life? Theses are the goals of many people once their in retirement. But what if you don’t feel like waiting until your 65 to retire? Most people will agree that the reason they can’t retire early is because they don’t have enough money. So how can you make your money grow into enough to live off during retirement? Here’s 5 tips that if you follow you will be able to accumulate enough wealth to retire early.
- Save as much as you can - You can’t expect to retire with much money if you don’t save a portion of your current income on a regular basis now. And if you plan to retire early, you will have to save even more! Saving your money is a critical step to any kind of retirement. Without saved money you will miss out on investment oppurtunies to grow your money. The more you can save now, the better your retirement income will be later. Creating a budget will help you track your inflows and outflows of money. A budget is a great tool to see where your spending most of your money and where you can save more.
- Avoid Expensive Living Habits - It doesn’t matter how much money you make if you spend all of it. Many high income households also have very high expenses associated with their life sytle. They fail to plan their retirement because they’re too caught up in living large. Here’s a very important point – It’s not what you spend, but what you save, that determines your wealth. Living below your needs is the smartest way the accumulate wealth and become financially independent.
- Invest - Most people simply don’t make enough money to support their current life style in retirement. This is why you must invest a portion of your current income on a regular basis in an investment account (retirement account). By investing in the market you allow your money to grow and your interest earned on that money to compound. With regular investments in your retirement account and the effect of compounding interest, your money can grow to huge amount over the long run.
- The Earlier, The Better - One of the most important factors that has a huge impact on when and what you retire on is timing. The earlier you start, the more retirement income you will accumulate. According to the Rule of 72, if your money is invested and gets a average return of 12%, your money will double every 6 years. This means if your current retirement portfolio is currently at 500,000, in just 6 years it will be $1,000,000!! See what a huge difference just 6 years can make? If you wait too long to invest you miss out on a lot of money.
- Have a Plan - Having a plan is essential to accomplishing many of your goals in life. If you plan to retire early its even more important! Use this free tool to estimate how much money you will need to have when you retire to support the life style you want to live. This tool is very helpful in making out your plan, and it allows you to input your own data. By manipulating the number you can see what it will take for you to accomplish your specific plan - Retirement Planner Calculator.
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What is a bond?
Are you investing in bonds? Whether you have bonds or are thinking of getting some, knowing how they affect your investment portfolio is a crucial part of ownership. First of all, a bond is a debt instrument issued by a company that needs financial funding from investors. To obtain this funding they issue bonds, which are essentially IOU’s, then use the money for business operations. A bond is a fixed income security – meaning investors get a fixed interest payment at regular intervals (annual, semi-annual, monthly, etc.) When investing in bonds you essentially lend your money to a company that needs it, and in return you receive interest payments and your initial investment back once the bond reaches its maturity date.
Lets go over a few important terms related to investing in bonds before continuing:
- Par Value – this is the value of the bond, also called face value, and is usually in $1,000 increments, but can be more. This is the dollar amount you will receive once the bond matures. The price you pay for the bond may differ from it’s par value depending on current market interest rates but the par value never does.
- Coupon Rate – this is the interest rate your bond carries or the income you receive from lending your money to the company.
- Maturity Date – this is the date the bond matures and the par value is payed back to the bond holder, along with any coupon payments.
How can investing in bonds help your portfolio?
By having bonds in your portfolio, you can increase your portfolio return when the stock market is low. So if the stock market is experiencing negative returns, the positive return from your bonds will off set your losses. Why don’t bonds decrease when the market is low? Because, as I mentioned before, they are fixed income securities and are obligated to pay the coupon rate at regular intervals and face value upon maturity date. This is why it’s important for people getting closer to retirement to have more bonds in their portfolio compared to stocks.
Investing in bonds does carry some risk. Default risk is the chance of the company defaulting on its debt or not being able to pay their investors money back. In this scenario a company goes bankrupt and has to liquidate their assets to pay back as much as they can to investors. Companies that are more risky will often have higher coupon rates compared to safer companies.
How do you know how safe your bond is?
Bonds get rated by an investment firms to determine how risky the investment is. Heres how two popular rating agencies, Moody’s and Standard and Poor’s, rate bonds:
Buying and selling bonds
You can buy and sell bonds at par (face value), a premium, or a discount in the secondary market. Securities are sold in the primary market first, this happens when a large investment firm buys huge amounts of stock from the company. Then we (small investors) have a chance to buy them in the secondary markets (NYSE, NASDAQ, etc.). The current market interest rate will determine if you buy bonds at par, a discount, or a premium.
If the current market interest rate is the same as the bond’s interest rate (coupon rate), the bond will sell at par (or it’s face value) – So if the par value is $1,000, the bond will sell for that price. If the market interest rate is less then the bond’s coupon rate, the bond will sell at a premium – more than $1,000. And, if the market interest rate is more then the bond’s coupon rate, the bond will sell at a discount – less than $1,000. The price of the bond is the only thing that changes, the interest rate and maturity date are specific to each bond and never change.
Why do bonds change in price? You can think of this as if the bond price is equalizing itself out to match the current market interest rate, since bonds are actively traded. No one wants to buy a bond that has low returns when the market is experiencing high returns unless they can get the bond at a discount. And, everyone wants to buy bonds with high returns when the market is experiencing low returns, so they will have to pay a premium. So if you buy a bond at a premium, you pay more for it because the coupon rate (the income you make) is higher then the current market interest rates. If you hold the bond to maturity you will receive the par value. This is less than what you paid for the bond because you bought it at a premium, but your lose is offset by higher coupon payments you received.
Types of Bonds
- Government Issued Securities – These include Treasury bills (T-bills), Treasury Notes, and Treasury Bonds. All of these investments are fixed income securities issued by the United States government. Because the government issues them, these securities are considered risk free and are backed by the full faith and credit of the government. For this reason their returns are also lower.
- Municipal Bonds – Issued by state and local government agencies. Municipal bonds are exempt from federal taxes and for this reason, they are very popular among investors. These bonds are also considered safer investments since cities don’t go bankrupt too often.
- Zero Coupon Bond – These bonds offer no coupon payments. Since there’s no coupon, zero coupon bonds are sold at large discounts. The return from the bond comes once the bond matures and you receive the par value.
- Corporate Bonds – These bonds are issued by corporations that need to raise capital for business operations. Since businesses are considered more risky, corporate bonds usually offer higher returns.
- Treasury Inflation-Protected Securities (TIPS) – These are also considered very safe investments since they are backed by the U.S. government. TIPS offer semi-annual coupon payments and protection against rising inflation because their par value rises with inflation.
www.InvestMoneyRight.com
1. Different ways to invest in stocks
Besides buying individual stocks and owning them, you can also purchase stock indirectly through a variety of investment instruments. When you buy a mutual fund, you (and other small investors) are investing in a portfolio of stocks created by a professional money manager. If you don’t have any knowledge of investing, this is an easy and affordable way to start investing in stocks. Having a professional manager does come at a cost though - IMPORTANT: Beware of your Mutual Fund Fees!!
Another great way to own a portfolio of stocks is by investing in an index ETF (exchange-traded fund). This has been said to be one of the best ways to own a portfolio of stocks. Index ETF’s are passively managed funds that match a market index by holding a portfolio of stocks in the same proportion to their weight in the particular index. ETF’s run at very low management costs giving you more return on your investments! A Superior Way to Invest: Is An Index ETF Beating Your Mutual Fund’s Return?
2. Building a portfolio of stocks
The safest way to invest in stocks, if you plan on doing it on your own, is to own a portfolio of them. By building a portfolio of stocks you spread out your risk amongst the various companies you invest in. When selecting stocks to invest in you want to choose companies that are in different industries, as this will diversify your portfolio. Once you accumulate around 30 different stocks over time, your portfolio should be properly diversified. Once diversified, you will eliminate your unsystematic risk and be left with market risk, reducing you risk exposure.
If 30 stocks sounds like a lot to buy, you might be better off investing in a mutual fund or an index fund. If you can’t afford to be properly diversified, investing in a mutual fund or index fund allows you to have ownership in a portfolio of stocks setup by a professional with low initial investments.
3. Different types of stocks
Common stock and preferred stock are two forms of ownership in a corporation. Common stock holders have voting power to help elect a board of directors. Common stock also has higher appreciation opportunities, and their prices fluctuate more. Compared to common stock, preferred stock has a higher ranking. If a company went bankrupt and liquidated their assets, preferred stock’s claims on assets are payed in full before common stock get their chance. Preferred stock also receive dividends on a regular basis, similar to a fixed income security. Dividends are only paid to common stock shareholders if their board of directors decide to do so.
Stocks are also identified by the size of the company (market capitalization). Small-cap, mid-cap, and large-cap are the three different sizes you can pick from when investing in stocks. Small cap stock are exactly what they sound like, small companies, and because of their size, they tend to be more risky. When investing in stocks, large cap stocks are generally safer because of their huge size. The S&P 500 index, most common market index, consist of the 500 largest corporations, i.e. 500 of the largest cap stocks.
Value stocks and growth stocks are two more common types of stocks. Value stocks are traded at a lower price compared to their intrinsic value. This is why they’re a good value – the stocks are undervalued! Investors will take advantage of the low price and sell it for more when other investors realize the stocks intrinsic value and the price goes up. Growth stocks are characterized by their ability to achieve above average earnings. These companies usually have an advantage over other companies in their industry that allows them to outpace their competitors earnings.
4. Invest on a regular basis
By investing on a regular basis, investor are able to always be investing in the market. You’ll invest when the market is low, and when the market is high, to receive the average market return. By receiving the average stock market return (around 10%), your investment will grow to huge amounts over time.
Mutual funds and ETF’s will allow you to set up an automatic payment each month that gets invested in your account. This investment can be as little as $25 a month. At that rate almost anyone can afford to start investing! And the longer your invested, the more money you make, so start investing young!
5. Buy low and sell high
Although you cannot accurately predict the market, and past returns have no indications on future returns, there are a few simple things to keep in mind:
Buy low and sell high – If you are investing in stocks for the sole purpose of making a quick gain and don’t have any need to stay in the market, then follow the common sense approach of buying low and selling high. If you see an opportunity to invest in stocks that you believe are undervalued in the hope of a quick revalue, then why not try to make a quick gain if you can. The question is how low is low and how will you know the stock won’t continue to drop.
6. Research before investing in stocks
Know what your buying before investing in stocks! Yahoo finance is a very good resource for the most current news concerning your investments. You can simply type in the name of the stock and yahoo will search the web for you to find all current news on the stock. Yahoo also includes the fundamentals of the stock, include latest price, graphs, ratios, and other essential info to help you invest. And it’s Free!
7. Fees from investing in stocks
When you buy and sell stocks you pay a transaction fee. This fee can range from $7-$10 per transaction every time you buy or sell shares of stock. The more you buy and sell within your portfolio, the more fees you are charged. Investing in stocks for the long term will help avoid excessive fees attached to buying and selling stocks too often.
8. Taxes
When you sell a stock for more than what you paid for it, you make a monetary gain. This gain is additional income and must get reported on your taxes as such. Depending on how long you hold the stock (long vs short) will determine the tax rate you are charged. If you don’t sell any stocks this year then you won’t make any additional income stock-wise, so no taxes….yet.
9. Pay your credit card bills before investing in stocks
Credit cards can carry huge interest rate charges when your bill is not paid in full each month. There’s no point in investing your money to try to achieve a 10% return when you are paying 18% for late fees. Don’t let your credit card spending get out of control as its very, very important to live within your means. Remember, its not what you spend, but what you save that determines your wealth!
10. Be invested for the long run
Sometimes it’s the simplest strategy that makes sense for all investors. Invest for the long run for a simple way to grow your money. This strategy will also lead to cheaper taxes and fees.
Related Articles
- What is a Mutual Fund?
- A Superior Way to Invest: Is an Index ETF Beating Your Mutual Fund’s Return?
- Investing in Bonds and CD’s
www.InvestMoneyRight.com
With the rising popularity of ETF’s (exchange traded fund’s) it’s no surprise investors are taking advantage of these low cost investment instruments. And with an Index ETF’s makeup being closely related to that of a mutual fund, many investors are starting to take notice of the benefits offered by ETF’s. Why wouldn’t you want to own the same stocks for cheaper? An Index ETF is a passively managed fund that mimics a particular stock market index (a way to measure a section of the stock market). It does this by holding a portfolio of stocks in the same proportion to their weight in the desired market index.
The Standard & Poor’s 500 Composite Stock Price Index (S&P 500 Index) is a very common type of index used. Mutual fund Managers trying to match the return of the S&P 500 Index will buy stock in companies included in the S&P 500 index – In this case the 500 largest publicly traded corporations in the United States. By investing in these companies managers can build a diversified portfolio of stock that they hope will get a return close the S&P 500 index returns. Make sense? Here’s the difference: mutual fund managers will try to buy and sell these stocks in attempts to beat the S&P 500 index return, while an index ETF will simply buy and hold a portfolio of stocks in the same proportion to their weight in the market index to closely match its return. Although you can’t predict what the stock market will do, mutual fund managers will try to buy low and sell high to get you extra returns. This task is actually a lot harder than it sounds and most managers end up missing out on huge gains because they sell the stock too early. An index ETF believes in a long term investing strategy, relying on the average market return as being the optimal market return. And with less than 20% of mutual fund managers actually beating their benchmark index return, what are the chances you’ll pick the one that does? It makes sense to invest in an index ETF so you know you will get the same return as the particular index you choose.
So why doesn’t everyone invest in ETF’s?
Althought ETF’s have be rising in popularity, many people still don’t know what they are. One reason for this is because financial advisors don’t offer them. Why not? Simple: They can’t make any money from them! The low management fees, and lack of a sales charge leave no room for a financial advisor to get their management cut. This is why it’s important to learn about, and take advantage of an index ETF. Another reason people don’t invest in an index ETF is because they usually require a higher initial investment. This may be a problem for some people, although it’s worth saving up the extra money to get into the fund. And with no sales charge and low fees, you know your whole investment is getting invested right away. Too many mutual funds have 5.75% sale charge just to get into the fund, thats $575 that the financial advisor gets instantly if you invest $10,000 with them. Beside the sales charge the average annual expense fee for a mutual fund is around 1.5%. What mutual fund fees are you being charged?
Why is an Index ETF better than a Mutual Fund?
Would you rather pay high fees or low fees to own the same portfolio of stocks?? That’s what I thought! An index ETF is a diversified portfolio of stocks that can be owned with low expense fees. These stocks are the same stocks a mutual fund manager would buy to build a diversified portfolio. The real impact driving your return is the amount of fees you’re being charged. Higher fees cause major drains on your investment. The average annual expense for a mutual fund is 1.5%, that’s a 1.5% decrease in your return every year! So, if your mutual fund manager tells you they will aim to get the same return as the S&P 500 index, they really need to beat the index just to cover their mutual fund fees. And as I stated before, less than 20% of mutual fund managers beat their benchmarks. So the combinations of high fees and lower portfolio returns while owning a mutual fund, shows that investing in an index ETF makes sense. If you invest in a index ETF your annual expense fee can be as little as .17%! This extra return on your investment adds up and in the long run you will make thousands of dollars more!
If mutual fund managers are trying to create a portfolio of stocks that gets a return close to the S&P 500 index (or any other index), but have built in, high management costs, why don’t you just invest in an index ETF on your own? This way you will get the same return as the particular index without all the fees associated with mutual funds.
Most importantly, an index ETF, such as the S&P 500 index, has outpaced the average equity mutual fund’s return year after year. The gap between the S&P 500 index return and an equity mutual fund’s return tends to be closely related to the higher fees associated with mutual funds. When investing in an index ETF (S&P 500 index) you can expect to have a minimum of a 1.3% increase in your annual returns, just in citing the lack of a sales charge and the low management fees saved during an average year of investing.
Related Articles
- 10 Tips for Investing in stocks
- What is a Mutual Fund?
- Investing in Bonds and CDs
www.InvestMoneyRight.com
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Now that you have a basic understanding of what the market is and how it works, I’ll show you how to invest money!
To invest your money you need an account that allows you to buy different types of investment instruments. Just like putting money in a savings account, you can put money in an investment account that holds your money. The money you put in your investment account can then be used to purchase stocks, bonds, mutual funds, ect. You can open an investment account online through a online brokerage firm.
What’s the best online brokerage firm to open an investment account with?
There are many different brokerage firms to choose from when deciding to open an investment account. Some of the major online brokerage firms include:
I personally use Scottrade as my online broker because of their low fees ($7 a trade)! Most online brokerage firms offer helpful tool to screen stocks and set alerts if your portfolio changes. They also offer helpful advice on how to invest money and help with using your investment account.
Now What?
So you set up your online investment account, now how do you use it? Its not as hard as it may seem. First, you must deposit money in your account so you can purchase stocks, bonds, mutual funds, ETF’s, ect. The easiest way to do this is by connecting your checking account with your investment account. This can be done by going to your online brokerage firm investment account (This example is for a scottrade account but is similar with other firms too) and selecting My Account/deposit/Make deposit – electronic transfer. Since its your first time making a deposit in your account you will have to add your bank account that will transfer funds to your investment account. Have your account number and routing number ready when adding a new checking account. You’ll also need to verify your checking account – your brokerage firm will make two small deposits in your checking account. When the deposits show up in your checking account you need to type the amounts they sent you in the appropriate spots. Once your checking account is setup with your investment account, you’ll be able to easily deposit funds from your bank account to your investment account with just a few clicks (My Account/Deposits/Make a Deposit – Electronic Transfer/ Make an ACH Deposit). Your checking account will now show up in the drop down menu on the Make an ACH Deposit tab and you’ll be able to easily transfer money from your checking account to your investment account.
How to buy/sell Stocks, Bonds, ETF’s, Mutual Funds, ect. with your investment account
Two basic transactions you will make in your investment account are to buy and sell different types of securities. After logging into your online investment account (in this case Scottrade.com) go to the Trade tab. You’ll see a Stock Order Entry form that you will need to fill out. Here are simple steps to fill out the form:
- Are you buy or selling a security? Simple select buy or sell
- How many shares are you buying/selling? The price of the stock time the amount of shares you buy will estimate your cost.
- Enter the symbol for the stock. This is also called a ticker number and consist of a few letters that is specific to the company stock your investing in. If you dont know the symbol for the company use the find symbol tool located next to the symbol box
- Order Type refers to how you are going to place your order. The most basic order type is a market order which means you buy/sell at the current market price. The other order types are more advanced but still easy to learn.
- Duration refers to the length of time before your open order is canceled because it couldn’t be filled. When investing in large companies your order will most likely get filled instantly; if you invest in a smaller company with low volume for trading your order may not be executed right away because not as many people are buying the stock
After reviewing your order you can submit it – You just bought your first stock!! The process is similar when purchasing bonds, ETF’s, and mutual funds – but make sure you know what your investing in before you invest your money. By researching
and learning how to invest money you will be able to identify whats the best for your situation. Learn how to Invest Money Right!
The longer you wait to invest, the more money you miss out on!
www.InvestMoneyRight.com
A mutual fund is a pool of money that is managed by a group of professional money managers. These money managers accept investor’s money, pool it together, and invest it in a portfolio of stocks, bonds, and cash. A mutual fund is an easy way to invest your money and can be started with as little as $25 a month. Low contributions to the fund, makes it possible for small investors, with little cash to invest, to experience and benefit from being in the market. You can also set up a direct deposit from your bank account to a mutual fund for an easy way to invest your money on a monthly basis automatically.
A mutual fund usually tries to perform to a benchmark i.e. a market index. For example, a mutual fund might try to match the return of the S&P 500 Index of 10-12%. The S&P 500 Index is an index that measures the price of the 500 largest publicly traded companies in the U.S. If the money managers want to benchmark to the S&P 500 Index, they would want to buy shares in the 500 largest stocks, i.e mimicking the S&P 500 Index. Get it? Other mutual funds benchmark to other indexes.
Why Invest in a Mutual Fund?
If you know little about investing, a mutual fund may be right for you. A mutual fund is professionally managed, meaning your money will be properly invested and diversified to reduce your risk without any help from you 
. In this scenario, a financial planner will most likely help you find a fund that works for you. Here are some pros of investing in a mutual fund:
- Easy and affordable to invest in
- Your money is professionally managed
- Numerous styles of mutual funds to match your preference
Which mutual fund is right for me?
Your situation, age, and risk preference will determine which type of mutual fund is right for you. If you’re younger, you can afford to take on extra risk to receive higher returns. On the other hand if your older, you’d be safer investing in less risky investments in case you need the money in your retirement years. A mutual fund is as risky as the stocks/bonds that make up the fund.
The biggest thing that affects the returns of a mutual fund are the fees being charged!!
In many cases a mutual fund will not perform to the desired market index benchmark – the gap between the benchmark return and actual return tends to equal the fees being charged by the money managers. Some better funds are internally efficient and have low operation expenses meaning lower fees for you. While other mutual funds may end up having bad management practices and higher fees because they are not as internally efficient! This means you are paying the bad managers more and receiving less in returns. For example, if you are picking between two mutual funds that are invested in mostly the same stocks/bonds/etc., pick the one with lower fees – Why would you pay more in fees to own essentially the same investment??
What fees are you being charged to own a mutual fund?
Related Articles
- A Superior Way to Invest: Is an Index ETF Beating Your Mutual Fund’s Return?
- 10 Tips for Investing in Stocks
- Investing in Bonds and CDs
www.InvestMoneyRight.com
Do you own a Mutual fund? Do you know your mutual fund fees?
Before you buy a mutual fund make sure you know what fees are associated with it. Mutual fund fees can lead to major drains on your investment. Mutual fund fees are different for each mutual fund, so associate yourself with the fees for each individual fund. Some of the major mutual fund fees include:
Shareholder Fees
- Front-end Load (sales charge): This is a one time fee that you pay to buy a mutual fund. The fee ranges from 0% – 8.5%, and the money is used to pay broker or advisors.
- Back-end Load (Deferred): Just like the front end load but the fee only applies when you sell a mutual fund.
Annual Operation Fees
- Management Expenses: This is a annual fee that pays for money managers to manage the mutual fund. There is no set limit to how much they can charge – so beware of management expenses that are high!
- 12b-1 Fees: This fee pays for marketing/advertising for the fund to attract new investors. It can range from 0-1%.
- Other expenses: This covers all other mutual fund fees.
How can I find my mutual fund fees?
The easiest way to find out your mutual fund fees is to look at your funds prospectus. The fund prospectus is legally required by the SEC for all mutual funds, and contains all the information on the mutual fund. You can find your mutual funds prospectus in a few ways:
- Go to MorningStar.com. In the quote search box on top, type in your funds name or symbol(usually 5 letters represent your mutual fund). On the bottom right side under the filings section, there is an option to see the prospectus.
- Another easy way to find the prospectus is to google your mutual funds name and add prospectus to it. For example, if I wanted to find the mutual fund fees assoicated with Pioneer Fund – Class A (PIODX), I could just type in PIODX prospectus in the google search engine and a list of different places would pop up that have the PIODX prospectus available.
- Or go straight to the investment company’s website and in the search box type in your mutual funds name or symbol. This should bring up an overview of the fund and there should also be a place to click and get the prospectus. There should be an option to see the prospectus.
Now that you have your mutual funds prospectus, lets check out what mutual fund fees are being charged
Here is a portion of the prospectus for Pioneer Fund – Class A (PIODX) which shows the mutual fund fees. I got the prospectus from morningstar.com by typing in PIODX and clicking prospectus.
As you can see above, the prospectus shows the Pioneer Fund – Class A along with other classes they have available. In this scenerio the mutual fund fees are as follows-
- Front-end load (sales charge): 5.75%. This means if you invest $10,000, $575 is taken out right away for a sales charge.
- Management fees: 0.61%. This is an annual fee paid every year on the balance of your mutual fund.
- Distribution 12b-1 fees: .25%, this is also an annual fee
- Other Expenses: .30%
Adding up all the annual fees will give you the total Annual Fund Operating Expense (1.16%). Don’t forget – your the one paying these mutual fund fees and they directly affect your return. So besides trying to match a market benchmark, your money manager will need to exceed the benchmark just to cover the annual fund operating expenses! The total annual fees are even more expensive with the class B Pioneer Fund- 2.24%.
Now do you see how mutual fund fees affect your return??
If these mutual fund fees sound high, its because they are! Thats why its important to take the next step and learn about ETF’s – an investment instrument similar to a mutual fund that can have total annual fees as low as .17%.
There are many investment strategies you can use to help grow your wealth. One of the best strategies is to invest your money for the long term. Long term investments rely on receiving the optimal average market return in the long term. A realistic investor knows the market can drop and rise by large amounts at any time. By having long term investments that can ride out the market lows, it’s possible to receive the average return. Too many people miss out on large returns because they only invest for the short term, and sell their investment too early! Here are tips on building a successful long term investments portfolio:
- Diversify – It’s very important to diversify your long term investments to reduce your unsystematic risk. When you buy stock in different companies, you lower your risk by spreading it out amongst the different companies. If some stocks suffer while other ones grow, your investment will be protected because of this diversification. You can diversify your portfolio by investing in companies in different industries, small or large companies, and domestic or foreign companies.
- Asset Allocation – this ultimately determines what your portfolio return will be. Asset allocation is the mix between stocks/bonds/cash in your portfolio. A person with an aggressive long term investments portfolio will invest most of their money in stocks and less in bonds and cash to receive a higher return. This is a good strategy for a young person just starting to invest or for someone with extra money to invest who is looking for higher returns. Less aggressive portfolios will invest more in bonds and cash in hopes of outpacing inflation with little risk of losing their initial investment. This strategy is better for an older person who will need their money for retirement.
- Market Timing - Although its almost impossible to accurately time the market, there are a few thing to keep in mind: Don’t sell your stock just because the market is low! You should actually do the opposite – think of the stocks as being on sale during a low period and buy more to make your average purchase price of the stock lower! When the stocks go back up your return will be even higher than your original investment. Also don’t always follow the latest buzz of a hot stock – The stock could be reaching its peaks and eventually revert back to the mean. Do your research before investing.
- Cost/Fees – Invest in good companies and keep them. The more you buy and sell the more fees you get charged. Besides fees eating away at your returns, you are most likely missing out on returns by selling too early. It’s also very important to buy long term investments with low fund management cost. This is more relevant when buying mutual funds – IMPORTANT: Beware of your Mutual Fund Fees!
- Invest money on a regular basis – Make a commitment to invest a small portion of your income on a monthly basis. Even small long term investments can grow to be very large amounts over time. For an example of what investing $25/$100 a month can turn into read – Why Should I Invest?. Investing on a monthly basis takes the emotion out of investing- Since you buy every month, the price will always be different.
Long term investments are a simple way to invest your money that makes sense.
www.InvestMoneyRight.com
Is your money invested right?
Are you building your portfolio the right way? Have you reduced your risk exposure? Considering the volatility of the market, it is important that you reduce all the risk you can. Here are 2 types of risk that can affect your portfolio, one of which you can reduce to zero thereby reducing your risk exposure:
- Systematic Risk also called Market Risk – Everyone is exposed to market risk, it’s the risk of being in the market. Situations that affect market risk are earthquakes, Terrorist attack, and other events that would affect all industries alike. The only way to lessen your exposure to market risk is by the use of derivatives – a lot more complex trading strategy.
- Unsystematic Risk – This risk is specific only to a certain company, so only investments in that company will be affected by the risk. Unsystematic risk situations may include: declining sales, a lawsuit, ECT. The good thing about unsystematic risk is that it can be diversified away. Meaning if you hold a portfolio of stocks, instead of just one, your risk will be spread out among all stocks, eliminating unsystematic risk from your portfolio.
How can I reduce my unsystematic risk to zero?
Buy more stocks for your portfolio! Around 30 randomly selected stocks should do the trick! It’s important they are randomly selected because you don’t want to be bias to only a few industries. That will lead you to be undiversified. For example, it would be best to have stocks that are inversely related – meaning the same news affects each stock in the opposite way. So if these stocks were in your portfolio, one would go up, one would go down, and your overall balance will stay close to the same. Now in real life the inverse relationship will not be perfect, one stock may go down more than the other one goes up, but either way it reduces your unsystematic risk when done properly.
As the graph above shows, as you add more stocks to your portfolio, you reduce your unsystematic risk. When you get around 30 randomly selected stocks your unsystematic risk will be gone and you will be left with just market risk. Your portfolio will be exposed to less risk and your investments will be in a good position to grow in the long run.
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How much money do you want to make while investing your money?
Are you trying to keep pace with inflation, or taking on more risk for a bigger return? Your answer to these questions will determine your risk and return preferences. Risk and Return are the underlying factors affecting the market’s returns. It’s important you know how risk and return affect each other when making investment decisions.
This concept is simple and straight forward: The more risk you take on, the higher your return is suppose to be. Here’s a very simple graph if you don’t understand -
So, what is risk?
Risk is the chance you have of losing money within your investments. Companies with more risk have a higher chance of losing money compared to companies with lower risk. Here’s the thing, if you want to make more money (higher returns), you have to invest in riskier investments! This is why you need to know your desired levels of Risk and Return. If you have extra money that you aren’t dependent on for other things, then you might take on the higher risk. Also, the younger you are, the longer your investment horizon is: You have more time to ride out the market lows to receive the average return. On the other side, if you are older, you might not want to take as much risk, especially if you need the money for your retirement years. In this scenario it’s safer to protect your investment with less risky investment.
When discussing returns you must consider the risk that was involved to get that return
Someone might think they did great in the market because they matched the market return of 10%, but how much risk did they take on? If you invested in really risky assets and only receive the market return, your investments didn’t actually perform to what they were supposed to, considering the risk. If someone is talking about how they did well in the market this year, ask them how much risk they took on. Risk and Return together will determine how well your portfolio performed.
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