Savvy Investing

Before you invest

Before you start investing your money in stocks, bonds and the like, you should make sure that your basic finances are in order. Once that’s done, investing doesn’t have to be a mystery, but it should be well planned.

First, define your goals.

This will help you decide what investment vehicles you should use to help achieve your goals.  Ask yourself: What do you want to accomplish? When do you want to accomplish this? Be specific when defining your goals—and make sure they’re realistic.

Make sure you have enough liquidity.

Having cash or assets easily converted to cash like share term certificates or savings accounts enables you to meet your commitments like bills and other expenses that may arise. But these types of assets will also help you meet short-term goals that you hope to achieve in the next year such as the purchase of new tires or paying for a weekend getaway.

Establish your time horizon.

How much time you have to meet your goal is called your time horizon. Time horizon influences your investment choices. Short-term goals have short time horizons; you need to be mindful to choose investments that make sense over the short-term. The same is true of intermediate-term and long-term goals.

Understand your risk tolerance. 

Risk tolerance is your ability to handle unpredictable results from the investments you make. Investments may go up or down in value. You need to think about how much fluctuation in value you can or want to handle to meet your goals. Longer-term investments like stocks and bonds typically have more fluctuations and risk over time. 

To invest well, you must be able to define your goals, afford to invest and understand the time and risk involved in achieving your goals. Once you bring this all together, you will be ready to form an investment plan and take action.

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Investing wisely

There are many different kinds of investments. Stocks, bonds and cash are the most common asset classes. You can buy each of these investments individually or as part of a mutual fund. Each asset class tends to react differently under the same economic conditions. While some are going up in value, others may be going down. Also, some asset classes simply perform better over time. For example, stocks and stock mutual funds tend to grow more over the long-term than bonds.

That’s why you should choose investments that don't react the same way so when one of your investments may be going down in value, your other investments will still be growing. By doing this, you will lower your risk of suffering a big loss at any given time. This process of spreading your investments among the three asset classes is called asset allocation. 

How you spread your investments among the asset classes depends on your appetite for risk and your reasons for investing. While stocks tend to offer higher returns, they also have higher risk.  Cash has very little risk but also offers no growth potential. Bonds fall in between. It’s always best to talk to a financial advisor to help you determine a good asset allocation for your needs.

Dividing your investments within each asset class is called diversification. Diversification can be accomplished in many ways. You could diversify your stocks portfolio by buying both growth stocks and income stocks, large and small capitalization stocks or any combination of these. You can also spread your stock choices among several industries like healthcare or retail. When it comes to bonds, you could buy some government bonds, corporate bonds, some short, longer-term bonds, or again, any combination of these.

The important thing is that you choose variety as well as quality.

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Types of investments

When it comes to investing, you have many options.  The key is to determine which ones are right for you. Once you have identified your specific goals, time horizon, and your appetite for risk, you can begin creating a solid investment plan. But first you need to understand the different types of investment options available.

If you’re looking for safe, low-risk investments that will pay you income, savings accounts, CDs, bonds or bond mutual funds are good options. Bonds and bond mutual funds carry more risk but also typically pay higher returns. These investments are also good for short-term goals (less than one year) because of their liquidity. If you’re looking for growth over a longer period of time, stocks and stock mutual funds are good choices. These investments don’t pay much income in the form of dividends. Instead, they reinvest corporate earnings to generate market share and stock value. They’re good for goals like retirement or college savings.

Here are some basic things to know about stocks, bonds and mutual funds:

When you buy stock, you’re buying ownership in a company. The more shares of stock you own, the more ownership you have in that company. Owning stock involves risk because the value of stocks can go up or down. This means that you could lose your money if the value is down when you decide to sell. On the other hand, if the value is up when you sell, you stand to make money. Even though their values may fluctuate daily, stocks tend to increase in value over time, which is why they are best for longer term goals such as retirement or a vacation home.

Buying a bond is like lending money to a company or the government. The bond is like an IOU and the company or government pays you interest on the money you have lent them. You get a stream of income, plus the face value of the bond when it matures. You don’t have to wait until the bond matures to sell it, but, like stocks, bonds can go up or down in value so there is some risk.

A mutual fund is a collection of many different individual stocks, bonds and money market accounts. Mutual funds allow you to invest at your own pace and often have a more stable rate of return than individual stocks or bonds. There are many types of mutual funds to choose from, so it is important to consult a financial professional to help you make a choice that works for you.

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When is the best time to buy stocks?

There is no right time to buy stocks. Once you have the funds available and have identified your goals, time horizon and risk tolerance, you’re ready to invest. That said, don’t jump in all at once. Instead, you should invest a set amount gradually over a period of time. Doing this will likely give you better returns in the long run. This is called dollar-cost-averaging. Here’s how it works:

Let’s say you have $1,000 to invest and have chosen a stock to buy. You should invest $100 each month into that stock rather than investing the entire $1,000 at once. Doing this reduces the risk of buying shares at the wrong time because you buy fewer shares when the price is higher and more when the price is lower. By dollar-cost-averaging, the average price per share that you end up purchasing will likely be lower and it’s always better to buy low.

Don’t try to time the market. You don’t have a crystal ball and you probably don’t have the time to watch stock prices all day, every day. That’s why you should set specific guidelines for buying and selling. Determine how much you’re willing to pay and at what point you are happy with the amount of gain an investment provides.  Even with dollar-cost-averaging, if a price is higher than you are willing to pay, don’t buy.

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Hi! I'm SVP of Financial Planning and Advisor Sherrie Krizic. Visit Financial Planning or give us a call at 877.367.5428. Our team is here to help.