The credit crash of 2008 caused many people to think more seriously about how to invest money to protect their lifestyles. Investing isn't only for sending children to college and funding your retirement. A well-planned and managed investment portfolio can provide the cushion you need to comfortably survive a personal or economic crisis. Wise accumulation and management of an investment portfolio is a skill that can be learned and put to excellent use.
Learn to invest. There is a right way and a wrong way to do everything, and while learning to invest the right way may not guarantee success, it might help you avoid damaging portfolio losses. Learn about economics and how the Federal Reserve manages the economy. Develop skills such as fundamental analysis of investments, financial statement analysis and technical analysis of stock price charts, and use those skills in deciding which investments to make.
Open an online account with a trusted brokerage firm. All major brokerage firms have excellent online tutorials for beginning investors and provide sophisticated portfolio management tools for you to use in building and managing your portfolio.
Take conservative first steps. Avoid penny stocks and companies you have never heard of. Stick to conservative mutual funds, such as high-cap growth funds invested in the stocks of large companies. Exchange traded funds, known as ETFs, can also be good choices for a beginning investor because they can provide broad exposure to many stocks with low management fees. Stick to the index ETFs and avoid leveraged ETFs. If you can't tolerate risk, weight your investment mix more heavily in short-term bond mutual funds. Remember, though, that it is always best to pick a diversification mix and stick with it. For example, an investor in her 20s may want to stick with a fairly aggressive mix composed of 80 percent stocks and stock funds and 20 percent bond funds and money market funds, since she has decades to recover from any short-term setbacks. A more conservative young investor might want to increase the bond mix a bit, maybe shooting for a 70 percent to 30 percent stock to bond mix.
Take advantage of your brokerage firm's investor service phone line. If you have questions, call or email and ask what you need to know about an investing system or a particular security.
- Use dollar-cost-averaging to build your portfolio. Make small, regular investments in one or a few investment vehicles such as mutual funds, ETFs or individual stocks. If you continue accumulating over time, you will buy at high prices and low prices, so your average cost on the investment will likely be fairly reasonable. Another way to accumulate a position is to buy dividend-paying stocks and sign up for the company's dividend reinvestment plan, or DRIP. Instead of receiving a check for your dividend, the company reinvests it in more shares of stock. As your number of shares grows, so does your quarterly dividend check and the number of new shares it will buy.
- Don't listen to people offering hot stock tips. This includes your friends, family and any emailed stock alerts from stock promoters. Never invest in anything you have not checked out yourself. If you decide to buy a speculative stock, never invest more money than you can afford to lose. Also, don't panic -- and sell out of a good portfolio -- if the market crashes. If you have chosen your stocks well, add more at the lower prices. Historically, the market has always rebounded. In a long-term bear market, a recovery may take years, but investing in strong companies at low prices is always a smart thing to do.
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