How to Make Intelligent Decisions About Where to Invest

Getting a handle on how much money you have to invest is the first step of the process.

Getting a handle on how much money you have to invest is the first step of the process.

You've got good jobs and you make decent money. You know you should be setting aside some money for savings and investments, but with so many financial products to choose from, it can be confusing to decide where to start. Creating a sound financial plan will help you make wise investment decisions.

Step 1

Create a balance sheet. This will let you know where you are financially right now. A balance sheet is a two-column form. List the current market value of all of your assets -- the things you own -- in the left hand column. List the current amount of all of your liabilities -- things you owe -- in the right hand column. Subtract your liabilities from your assets. Whatever is left is your net worth.

Step 2

Create a workable budget with your current financial status. A budget is not financial handcuffs, and it is not a dirty word. A budget is simply a way of giving a name to how you spend your money. Create a two-column form. List all of your monthly income in the left column. List all of your monthly expenses in the right column. Subtract your expenses from your income. Whatever is left is the money you have available to invest or spend as you see fit. If it is not enough, you may want to examine your spending habits and see where you can cut back.

Step 3

Write down your financial goals. Get specific. Things like "I want to retire comfortably by the time I'm 50" don't mean much. You have to identify what "retire comfortably" means. It's like the Cheshire Cat told Alice in Wonderland; if you don't know where you are going any road will take you there, but you might not like where you end up. Before you can make intelligent investment decisions you have to know where you want to be in 10, 20 or 30 years.

Step 4

Determine your investment temperament. This is all about your level of aversion to risk. If you lie awake at night wondering whether the stocks in your 401(k) are losing money, you may have a low tolerance for risk. If the thought of leaving your money in an FDIC-insured certificate of deposit for two years makes you antsy, and you'd rather take the money to Vegas and roll the dice with it, you may have a high tolerance for risk. Knowing your investment temperament helps you select investments you can live with.

Step 5

Diversify your investments in a range of securities that fits both your investment goals and your investment temperament. Use the investment pyramid as a guide. The base of your pyramid contains low-risk securities, such as money market funds, Treasury securities and bank certificates of deposit. The next level includes growth and income securities, such as investment-grade corporate bonds and blue chip stocks. Focus on growth stocks for the third level. At the top of your investment pyramid are speculative securities, such as precious metals and aggressive stocks. The percentage of your total investment dollars that you put into each category depends on your goals and level of risk you are comfortable with.

Tips

  • You don't have to wait until you have a large amount of money. Start investing with what you have, no matter how small the pot is. Successful investing is like driving on ice. There are two rules: get started and don't stop. Regular, consistent investments pay big dividends in the long run.
  • If you don't have the time or expertise to manage your own investments, consider purchasing shares of a mutual fund that meets your investment parameters. Mutual funds offer the twin benefits of instant diversification and professional management of your funds.

Warning

  • All investments involve some level of risk. Past performance is not a guarantee of future results. You may lose money on any investment.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

Photo Credits

  • Hemera Technologies/AbleStock.com/Getty Images