by: John Mussi
As the world economy continues to grow, more people than ever are turning to the stock market
in an effort to find ways to make their money work for them. Unfortunately, not everyone is able
to master the market effectively. To help you to make sure that you get the most out of your
investments, the information below will provide tips for when, how, and if you should invest.
Be Sure that You're Ready
It makes no sense to invest in stocks, bonds, or mutual funds if you have thousands of dollars in
credit card debt at interest rates in excess of 10%. You don't have to be completely debt-free, but
you should be making serious inroads into your debt each month, and you should be paying very
low interest rates on that debt. Also, be sure you are secure in your basic living expenses. You
generally want enough savings to survive for three months in case of a job loss, disability, or
Where Do I Find the Money to Invest?
The first question for many people is "where do I get the money to invest?" There are plenty of
stock mutual funds that allow you to invest with relatively little money. Use your next bonus at
work, or your income tax refund, or put in some overtime for extra cash. If you can't come up
with the money to start these portfolios, many funds will allow you to skip the initial lump sum
investment if you sign up for automatic monthly withdrawals from your chequeing account.
How Do I Choose an Investment?
How do you choose a long term investment? The first step is to know what your goals are. Are
you saving for a house? A college education? Retirement? The type of investment you choose
will depend on the amount of time available before you need the money. Stocks are considered
long-term investments, so it is best to plan on holding stocks or stock mutual funds for five years
or longer. If you need the money sooner than this, you may reduce your return by cashing in
when the stock's value is down.
How Do I Determine My Risk Tolerance?
Next, you need to know your risk tolerance. If you don't trust the bank to hold your savings, then
you're probably not going to feel comfortable investing in volatile technology stocks. If you're
likely to keep up with the latest curve of rising corporations, you might be interested in trying a
moderate risk in your investments. High risks can yield high rewards, but should usually not be
your primary investment for obvious reasons.
How Do I Choose an Investment?
How do you decide where to put your money? Most experts recommend spreading your money
over several different types of investments to reduce risk, because typically one type of
investment does well when another doesn't. For example, usually when returns on stocks and
stock mutual funds are high, returns on bonds are low, or vice versa. By having money in both
types of funds, you're more likely to get a decent combined return if one category takes a
downturn. Your asset allocation should be tailored to your risk tolerance and how long you'll
need to withdraw the money from your investments.
For beginning investors, stock mutual funds are more popular than stocks in individual
companies. A well-chosen stock mutual fund is less risky than an individual stock because
mutual funds invest in many companies, thus spreading out the risk. If one company does poorly,
the fund as a whole may still have a good return.
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This article was posted on January 23, 2006