Thinking about investing?
Investing in stocks and bonds is one way to increase your wealth over the long haul. Unfortunately, it is also a way of losing a lot of money in a hurry. Want to take $10,000 and turn it into $5,000? Try investing in stocks. You might just watch your money disappear.
Here are some things to consider BEFORE ever buying a stock:
- Do you have an emergency fund? This is a fund of money sitting in a bank account. How big should this fund be? About enough to live on for eight months. That may seem like a lot of money, but it is important to have. Then if worse comes to worst, you will have a cushion of cash to fall back on.
- Do you have credit card debt? You are probably paying a lot of interest on this, so the best policy is to pay this off. Don’t even think about investing until it is paid up.
- How is your employment situation? Are you and/or your partner situated in secure employment? If your employment is shaky, it is not the right time to invest.
- Are you prepared to spend time to learn about investing? Read The Battle for Investment Survival by Gerald M. Loeb; and also Beating the Street by Peter Lynch. Subscribe to Money Magazine and watch Suze Orman on TV. You need to be somewhat prepared before you invest your money. You will also have to spend time every day after you invest tracking your purchases. Learning about investing and following your investments should be considered a life-long part-time job.
OK. Let’s assume you have all of the above items under control. What next? Open an account with a large mutual fund company such as Fidelity or T.Rowe Price. Put some cash into this account and add to it regularly. If you’re lucky you have an employment-based 401(k) retirement account with an employer match. Or you may be able to have money deducted from your paycheck and deposited directly into such an account. Pick out which of their mutual funds you would like to buy, something that specializes in the so-called Large Cap or Blue Chip Stocks (the stocks of large, well-known companies.) One example would be T. Rowe Price Blue Chip Fund. Now you can follow this mutual fund daily and learn how it reacts to events.
Finally, you can make a purchase. Start with a small amount of this fund and follow it every day. Read the prospectus to learn more about your fund. Resist the urge to buy and sell. You will surely guess wrong and end up losing money. Just buy and hold. If it is working out well, buy a little more every three months, adding to your position. Over time, the stocks should go up as our nation gets richer.
As this is being written, many investors like dividend bearing stocks, so maybe you could buy a small amount of a mutual fund that specializes in such stocks, such as Vanguard Dividend Growth Fund. Buy and hold.
If conditions warrant, sell a fund, but have a good reason. As the years go by, you might add several more mutual funds as you gain more knowledge.
After you have made a thorough study, you might even buy shares in an individual stock. But be careful, they can lose money fast if you don’t pay attention.
Some people prefer to turn their investment accounts over to an investment company to manage. Picking the right company is an incredibly important decision, so ask a lot of questions. Make sure they are insured against fraud. My advice is to select a “fee only” company. They will charge you a flat fee to manage the account, usually a percentage of your balance. Look for conservative, safe investments. Don’t plan on making a lot of money fast. That mind-set is a good way to end up losing. Instead, aim for a steady increase over time.