Here are 10 suggestions to get you started.
1. Establish investment goals.
Understand exactly what it is you are investing for. A college fund might look very different from a retirement account. The longer in advance you can start planning for your future needs, the better chance you have to realize these goals.
2. Make a budget.
Before you choose an investment strategy, you need to determine how much money you will have available each month to put away. If the amount available for investment after expenses is less than desired, look for items you might consider doing without. Smokers, for example, could save a couple thousand dollars a year by cutting a pack a day.
3. Eliminate debts.
Unfortunately, the ending of Fight Club was just a pre 9-11 fantasy. If you owe the man, the best investment you can make is eliminating your debt to him. Tackle the debts with the greatest interest rates first. As credit card debt can cost 20% or more a year, it would be pointless to invest money before paying off a certain loss.
4. Understand the risks.
Any investment with a higher return than a savings account (which is guaranteed up to a certain value in most countries) has an accompanying amount of risk. A general rule of thumb for determining the stability of an investment is the higher the promised returns, the higher the risk is that you could lose your initial investment.
A corporate bond that pays you a 15% annual return is doing so because the company that backs the bond has been deemed more likely to go bankrupt than a company whose bonds pay a 10% return.
Temper the risks you are making as an investor by spreading out your money over a variety of investments. Any given stock, bond, real estate purchase or financial instrument could swing dramatically in value.
One excellent way to buy a broad representation of the market is to invest in a mutual fund. The Vanguard Total Stock Market Fund, for example, is a passive index that mirrors the average return of thousands of American stocks.
Vanguard also happens to be an investment company with a reputation for charging the lowest management fees in the mutual fund business. The logic behind a Vanguard TSM investment is that average performance with less than average fees yields a better than average return.
6. A penny saved…
Don´t worry about the staggering number of choices available for your money. The simple act of setting money aside is an investment as it is money for future use. In the short term, markets are volatile.
If you started stuffing bills in the mattress six months ago you would have gotten a pretty return vis a vis any mutual fund you could have purchased. This does not mean that there aren’t better opportunities for your money. Take time in studying your options and invest in increments.
Even hiding money in the mattress has risks–your house could burn down.
7. In the long run…
A new investor is right to be wary of investing at a time when some economists are predicting a second Great Depression. Over the long run, however, most investments will outperform your mattress.
Even the unlucky soul who put all his money into the stock market in 1929 would have seen a return on that investment if he had waited 25 years. Assuming that capitalism survives the current crisis, the longer your time frame, the better chance you should have of seeing your money appreciate in value.
8. Don´t try to beat the market.
Bottom line, capitalism is a system that seeks the accrual of riches. Overwhelming brainpower and resources in our society are devoted to competition for the highest possible financial returns. Keep in mind markets are a zero sum game–for every buyer there must be a seller.
A smart and well educated individual is no match for the massive computer systems, avaricious investment houses, and opaque hedge funds that make up Wall Street. Rather than actively competing with every last Gordon Gecko or trusting in the likes of a Bernard Madoff, passive investments like index funds are a safer alternative.
An index fund will piggyback off these machinations and yield the average return of the broader market.
9. You are what you invest.
Remember how your money is working for you and what it represents. Those wary of backing Philip Morris or the Carlyle Group may consider a firm that offers a path to ethical investments. You might sleep better knowing your money is invested in companies seeking solutions to tomorrow’s problems, not creating them.
10. Invest, then spend.
Don’t forget that despite the hours and years you devote to building your investment portfolio, it is only a means to future consumption. If you don´t spend the fruits of your labors, someone else will.
If you’re not ready to start investing, there are still ways you can cope with the current economic downturn. Check out our tips for exercising without a gym membership or read about ways you can cut costs here.