What should my long-term financial goals be?
The first step is to figure out a realistic financial goal for yourself and your family. Talk with your loved ones to ensure that everyone has the same goals in mind. Clearly not all families will have the same end goal – figure out what is important to you, whether it is early retirement, financial comfort, children’s education, travel, taking care of elders, or your children.
Are there simple guidelines to follow towards a comfortable retirement?
Someone starting their savings in their early 20s can save 10% of their income and have a sufficient nest egg, while someone starting in their 40s may have to bump that number up more towards 20%. This is all dependent on the time of your life that you choose to start, the size of your current nest egg, and the amount of money that you will need to retire comfortably.
It is always a good idea to contribute as much as possible to retirement plans, to take advantage of tax deferral and employer matches.
Generally people need around 80% of their pre-retirement income after they have retired for the first few years and then learn how to live on less. This will greatly depend on the expenses that you plan on having:
- Is the mortgage already paid off?
- Do you have car payments?
- Are you sending your children through school?
- Another strategy worth following is to always have an emergency fund of at least 6 months of
- expenses. Considering your situation and the situations of the people that you depend on or depend on you, you can adjust the number of months accordingly, but 6 is a good ballpark number. This will also depend on how many bills you need to pay.
What should I take into account when I start investing?
Risk vs. Return
The first step in the investment process is to figure out what sort of Return on Investment (ROI) that you are seeking and to determine what level of risk that you are willing to take.
The risk that you are willing to take and the size of the ROI that you receive are correlated. In order to take a higher risk, you must have a reasonable chance of a higher return. The size of the risk will be affected by many factors in the market, and it is recommended that you consult trusted professionals.
These professionals will have ideas and recommendations for your investment portfolios, but never invest more aggressively than you feel comfortable with.
Asset Allocation is the selection of assets from across the asset classes: stocks, bonds, and mutual funds. This is a way to minimize risk. It ensures that if one of these groups takes a drastic downturn, you still have investments in the other sections and hopefully won’t take large losses. It is recommended to allocate through at least 5 types of classes.
Diversification is similar to asset allocation, but within the asset class. For instance, diversification would be buying 15 or 20 different stocks, with the same purpose in mind as asset allocation, to minimize risk and to make sure that if something tanks, it doesn’t take your entire portfolio down with it.
You can start by examining your trading records and ensuring that all of the trades went through at the prices that you instructed and with the correct commissions. Make sure to keep a good paper trail of all the transactions that occur in your portfolio just in case you ever need to contest anything.
Keep tabs on how your assets are performing. If they seem to be underperforming, you may want to change your investments to some that may be more lucrative. You may want to also check to make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.
What risks will I be exposing myself to by investing?
There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks.
When the rate of return is great, the risk usually is as well. Depending on the situation, you may put yourself at risk to lose all of your initial investment.
There is a great difference in the liquidity of assets. Some can be sold in moments, and some may take quite a bit of time — take this into consideration when buying. Some may also have penalties for selling early or maturation dates.
Investing in a company with little or no history is much riskier than those with a proven track record. The previous performance of a stock doesn’t necessarily mean that the stock will follow that pattern. Pay attention to news that pertains to the companies that you hold, information that is released about the companies in the news can seriously affect the values of the investments you hold.
How can I avoid taking unnecessary risks?
- Always trade through your brokerage firm.
- Never make purchases from phone solicitations offering the next hot stock.
- Never send personal checks to a sales rep, always to the company.
- Always receive your monthly statements to double check that everything is correct and that there are no irregular charges.
- If any sales representatives attempt anything that seems out of place, contact the branch manager of the company.
What factors should I consider before making a stock investment?
- Is this investment too risky for me?
- Do I feel comfortable with this investment?
- Do I have any moral conflict with what the business provides?
- Is this investment registered with the SEC?
- What sorts of fees are associated with this investment? Does it have a load that could possibly cancel out the earnings that you would receive?
- How liquid is the investment? Could I sell this quickly?
- What would need to happen in order to profit from this investment?
What factors should I consider before making a mutual fund investment?
- How has this fund performed previously?
- Is there a load? What fees are associated?
- How often will they produce statements?
- What does the fund invest in?
- Are there any specific risks related to this investment?
What investment pitfalls should I be on the lookout for?
- Don’t invest emotionally. It is better to keep a moderate controlled approach to investing as opposed to constantly chasing the jackpot which can be dangerous.
- Don’t trust tips. If you aren’t the head of a large investment firm, by the time a tip reaches you, it is probably too late.
- Pay attention to your investments. Stay involved with what your investments are doing, don’t rely solely on others helping you.
- Reevaluate. Your financial situation may change over the course of time, be sure that all of your investments are still appropriate.
How should I allocate my IRA investments?
IRAs are just like any other investment — you should take into consideration how much risk you are willing to take on and act accordingly.
For people who are more risk-averse, fixed short-term investments could be more fitting.
Be careful about investing in municipal bonds – by doing so you will sacrifice return that would convert tax free income into taxable income.
What are derivatives and options?
Derivatives are investments whose values derive from the security which they are based on. Options can be useful in making a portfolio less risky. Derivatives can also be futures contracts or swap agreements.
Stock options are a contract that allows one to sell or buy 100 shares of stock at a given price and in a specific time frame. These can be traded on numerous exchanges.
When an option is bought, an investor will buy a premium, which is the commission plus the price of the option. If an investor is to buy a “call” option, they are predicting that the price of the security will increase before the option period expires; on the other hand, if the investor buys a “put” option, then they are predicting that the price will decrease.
This can be a useful tool in an investment portfolio, but not recommended for beginners, if you are interested in trading options, be sure to do your homework.
What are the biggest mistakes investors make?
- Starting too late
- Paying high fees
- Investing Emotionally
- Using a one-size-fits-all plan
- Not taking taxes into consideration
- Overly Risky Investing
- Starting Too Late
- Paying High Fees
- Investing Emotionally
- Using a One-Size-Fits-All Plan
- Not Taking Taxes Into Consideration
- Overly Risky Investing
What is the difference between Cumulative vs. Annualized Return?
Annualized return is the return on investment received that year. Cumulative return is the return on the investment in total.
For instance, the money gained in the first year of an investment would be the annualized return. The total return of investment accumulated at the end of the second year would be the cumulative return.
What is the Rule of 72?
The rule of 72 is a quick way to calculate how long it will take your investments to double at different interest rates.
Take the rate of yearly return on your investment and divide 72 by that number. The result is the number of years it will take for you to double your investment.
What is significance of total return?
The total return is the amount of money that a fund makes after reinvesting and receiving dividends. This will deliver the most benefit from the compounding interest. The total return is a way to accurately gauge the real return on investment that you will get with a mutual fund.