Investing For Beginners - How Do I Start Investing? (Cont)

Start Investing. Once your account is open and funded (follow the instructions from your broker to learn how to fund your acccount), it is time for you to make your first investment(s). Here are some tips:

• Choose your risk level to invest in. Decide on how much risk you are willing to take, and on how much risk you are comfortable with. The longer your time horizon, the more risk you should take. The more risk you take, the higher your return should be. When you take risk, make sure you try to diversify within your risk level. For example, if you are investing in medium risk, large cap investments (like Fortune 500 companies or S&P 500 companies), either buy several stocks or buy a mutual fund that invests in a broad array of these companies.
• Choose your asset class(es) to invest in. Do you want to buy money market accounts (or CDs), stocks, bonds or real estate. If you have a long term investment horizon (over 15 years), then there is no need to invest in bonds yet. Most investors are best suited to buying stocks. Stocks include individual companies, stock market tracking stocks (like the QQQ or SPiDERs), and of course mutual funds.
• If you are starting out with only a small amount of money, don’t worry too much about diversifying your investments. Start by buying a single mutual fund investment in the risk category you are interested in. To find a suitable mutual fund, check with your brokerage to see what they offer. Most brokerages give you access to thousands of funds. (See How to Select An Investment below on how to select one.)
• As your investments grow and you invest more and more money, start to diversify your investments to include investments from multiple risk categories (preservation, income, growth, aggressive growth) and asset classes (money markets/CDs, stocks, bonds).

How to Select An Investment. Here are some tips on how to narrow down your selection of investments.

• CDs – Choose your time horizon. Then find the CD closest to that time horizon with the highest rate. Shop around at your local banks or through your brokerage account.
• Money Market Accounts – Offered by banks and brokerages. Choose between tax-free and traditional accounts. Then look for the highest rate. Tax-free accounts are more beneficial if you are in a very high tax bracket, but they pay a lower interest rate.
• Stocks – Picking individual stocks is the riskiest method of investing. If you are just starting to invest, you should probably start with stock mutual funds. However, it doesn’t hurt to add a small percentage (never more than 10% of your portfolio per single stock) of individual stocks to your account. Doing so will likely increase your participation level and interest in the stock market. To pick individual stocks, use a variety of tools, many of which are offered through your online brokers. Find companies that you know something about and that have a good reputation. Then, read about the company and learn about their business. Try to get your hands on some research reports to learn what other people think (but remember that research reports are wrong as often as they are right). Look for long-term trends that will benefit the company you like. Always invest for long-term reasons and don’t ever buy a stock simply because it is popular or because you think you know something others don’t. As a previous research analyst, I can safely tell you that every time I knew something that the rest of the market didn’t know, I was wrong as to how the stock would react to the news. Basically, I’m saying that you can’t predict the short-term fluctuations of the stock market or of individual stocks. The best way to invest is to find long-term, sustainable business trends that you can invest in, and then to hold your investment until you think those trends are changing. A great way to find stocks to read is to subscribe to a magazine that offers opinions and spells out their business models (try Smart Money or Kiplinger's) . Also, word of mouth works to give you ideas, but don’t be too hasty acting upon other people’s ideas. Quite often they are just repeating something they heard from their broker, or from a friend of a friend of a friend.
• Mutual Funds – Use the tools from your broker, or other sites like Yahoo Finance or Motley Fool, or even magazines like Money Magazine to learn about and compare different funds. Find a fund in the risk category you are comfortable with (capital preservation, income, growth, aggressive growth) that has demonstrated at least market average returns over the past. It also makes sense to go with funds from companies that you’ve heard of before (like Strong, Janus, Putnam, Fidelity). These companies will likely be in business longer and often attract better portfolio managers than other funds. Also, remember that previous results are not indicative of future results. High flying funds often falter for years afterwards, and the top performing funds often come from previously under performing managers. To find out if a fund is right for you, read their prospectus, which can be found on the website of your online brokerage, on the website of the fund company, or through request from your broker or brokerage. Look at the quality and experience of the managers of the fund, their investment philosophy, and the list of the top stocks held in their fund (all of these are required to be reported in the prospectus). Also, look at the fee structure of the fund. An average management fee shouldn’t exceed a few percent a year. Also, some funds charge you extra fees to purchase or sell their shares. Stay away from these funds. And most importantly, don’t fret too much about which fund you are buying, and when you buy it, and try not to be too critical of its performance. Give it some time before you judge its results. If it’s not working out a year from now, then consider buying a different fund.
• Bond Funds – Search for a bond fund the same way you search for a stock mutual fund. I wouldn’t recommend buying bond funds unless you are nearing retirement, or unless you have a very large portfolio that you need to diversify. When buying bond funds, look at the duration of each fund. Find out whether it invests in long-term, short-term, or medium-term bonds. Use your online broker’s tools (or Yahoo Finance) to look at their historical returns versus other funds. Look for good brand names and read the fund’s prospectus to determine if it is right for you.

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