Saturday, February 20, 2010

Invest Slowly

Tip #233 - Invest Slowly. There are salesman who will try to sell you financial products that have the potential to earn 20 percent. There are friends who brag that they are fully invested n the stock market. There are others who look down on a fixed return as being boring and not keeping pace with inflation. And to them I say, you are not making 20 percent without a lot of risk. If ALL of your money is in the stock market, I hope you sleep well at night. And while a fixed return may be boring, it's also guaranteed.

When you are starting on your financial savings journey, do not be intimidated by or invest in financial products you do not understand. Start out slowly. Putting $100 away per month into a savings account may not be the best investment ever, but it is a place to start. As you build up your savings, you can buy a CD for better returns or put your money in a money market account. And then maybe you will buy some government bonds. And then and only then when you are ready to take some real risk - that is risk that the principal that you put in can go down in value - should you start to invest in other products such as mutual funds or maybe even some individual stocks.

As with any other skill, learning about investments builds upon itself. You don't learn to do triple axles before you learn to do a single. You don't attempt black diamond mountains until you've mastered the green. Why would you start putting your money in "high flying" investments without being comfortable in the basic investments first? You wouldn't. And don't let anyone tell you differently. Sure you may not earn the highest return on your investment, but you won't fall flat on your face either. The key is to start slowly.

Stocks and mutual funds are not appropriate for all of your investment needs, and for a beginning investor, possibly not any of your investments. They do have a place as part of most people's investment portfolios - such as long-term savings for retirement. But there is no need to rush into investments that you are not comfortable with. Sure the 20% returns look great. But look at past performance and ask yourself how comfortable you would be the value of your money lost 10%. Until you are ready for that volatility, you are not ready for it. Start up a nice base savings first. It's easier to lose some of your investments when you have other investments that are stable. In the beginning, don't be embarrassed to have your money in CDs. And maybe after you have built up savings for a year or two, you can start loooking into other investments for some of your longer-term money. But start slowly.

In Real Life (IRL) - From the time I was a child, I had a passbook savings account. It was fun to watch my money grow (5% interest!) each month. As I got older, my dad talked me into putting some money into government bonds (paying 6% interest) and the interest was tax-deferred until it came out. Then as my savings accounts grew, I put some money into money market accounts for a higher interest rate. And I bought some CDs for a higher interest rate also.

It wasn't until I was in my 20's that my dad talked to me about mutual funds. Sure, I had learned about them in college - I was a finance major. But personally investing in them was something new to me. And I was scared to make that leap. At the time (early 1990s), even the worst mutual funds were making money. And yearly returns of 20% to 30% were almost common. But I was still scared. I had never "lost" money before (unless you argue that I lost buying power due to inflation by having my money earning low-yield interest). So my dad said if I lost money, he'd make it up to me. That was a nice way to ease into the world of mutual funds. I will never forget the first statement I got that was literally days after my initial investment that showed my $200 (or whatever the amount was) was now worth $197. I was devastated. But I kept at it, and sent a monthly contribution off to a mutual fund. This was long-term savings for me - money to put toward a house 10 years down the road. As I grew comfortable with that, I bought individual stocks, first through an investment club, and then on my own. And all along, I put retirement money into mutual funds offered through work.

The point is, it was a slow process. I didn't start taking on greater risk until I was ready for it and until I had a good base of money sitting in the bank and in government bonds. I also only invested in riskier investments when it was for longer-term goals. I kept my "emergency" fund or my base money in guaranteed investments. Even today, I keep a fair amount in lower yield investments. CDs paying 4 percent if fine with me as part of an overall portfolio. I am not trying to impress anyone with all of the sophisticated investments I make. I am trying to maximize my return and still be comfortable with the investments I make. You should, too.

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