One of the things I hear a lot writing is that the "average reader" is a guy in his late 20s, meaning I often get reminded that I need some columns and suggestions for the beginners reading my words. Guys and gals who are just a year or two out of college, now have good jobs and want to know what they should be doing for their futures. That's why this month I'll look at some of the "basics" and see if I can offer some tips.
First, I understand that if you're starting out as an investor, you might be feeling overwhelmed. After all, it seems like there's just so much to know. How can you get enough of a handle on basic investment concepts so that you're comfortable in making well-informed choices?
Actually, you can get a good grip on the investment process by becoming familiar with a few basic concepts, such as these:
Stocks versus Bonds — When you buy stocks, or stock-based investments, you are buying ownership shares in companies. Generally speaking, its a good idea to buy shares of quality companies and to hold these shares for the long term. This strategy may help you eventually overcome short-term price declines, which may affect all stocks. Keep in mind, though, that when buying stocks, there are no guarantees you won't lose some or all of your investment.
By contrast, when you purchase bonds, you aren't becoming an "owner" — rather, you are lending money to a company or a governmental unit. Barring default, you can ex¬pect to receive regular interest payments for as long as you own your bond, and when it matures, you can expect to get your principal back. However, bond prices do rise and fall, typically moving in the opposite direction from interest rates. So if you want to sell a bond before it matures, and interest rates have recently risen, you may have to offer your bond at a price lower than its face value.
For the most part, stocks are purchased for their growth potential (although many stocks do offer income in the form of dividends) while bonds are bought for the in¬come stream provided by interest payments. Ideally, though, it is important to build a diversified portfolio containing stocks, bonds, certificates of deposit (CDs), govern¬ment securities and other investments designed to meet your goals and risk tolerances. Diversification is a strategy designed to help reduce the effects of market volatility on your portfolio. Keep in mind, however, that diversification, by itself, can't guarantee a profit or protect against loss.
Risk versus Reward — All investments carry some type of risk: Stocks and bonds can decline in value, while investments such as CDs can lose purchasing power over time. One important thing to keep in mind is that, generally, the greater the potential reward, the higher the risk.
Setting goals — As an investor, you need to set goals for your investment portfolio, such as providing resources for retirement or helping pay for more college education or that home you hope to use every Winter in Palm Springs.
Knowing your own investment personality — Everyone has different investment personalities — some people can accept more risk in the hopes of greater rewards, while others are not comfortable with risk at all. It's essential that you know your investment personality when you begin investing, and throughout your years as an investor.
Investing is a long-term process — It generally takes decades of patience, persever¬ance and good decisions for investors to accumulate the substantial financial re¬sources they'll need for their long-term goals. Do not be in a hurry, but do be prepared to change your strategy and move your money around to get the best results as time passes. What's a great stock or bond now might not be in five or 10 years time.
By keeping these concepts in mind as you begin your journey through the investment world, you'll be better prepared for the twists and turns you'll encounter along the way as you pursue your financial goals. As always, I, and other financial advisors, planners and accountants are around to offer help and suggestions, so do not be afraid to ask!
On this same line of thought, a reader recently asked me what he should do if he wants to change his mind and reverse an earlier decision he made not to go to college. In other words, he now wants to plan on attending. If you are like him or you already attend school, you're keenly aware that it's getting close to back-to-school time. Today, that might mean you need to go shopping for laptops or iPads. But in the future, when "back to school" means "off to college," your expenditures are likely to be significantly greater. How can you be financially prepared for that day?