Investing: A Primer for BEGINNERS. Part 2

Various Investing Stragegies

An investing stragegy is nothing more than the method you use to put money into an investment, and to manage that investment once you have money in it.

Putting Money Into Investments

The first thing you have to decide is WHETHER to put money into investments. 

My response to that is a resounding YES! ABSOLUTELY! No question. Do it!

If you are not putting 10% of your earnings into some sort of savings or investment account, then you're missing one of the best chances you will ever have to increase your own personal wealth.

My own personal opinion is that everyone needs to learn to live on half of their income, or even less. I can hear you gasping in horror even now. WHAAAAT? How can you say such a thing? 

Consider this: Federal and state taxes take about 30%. That's "only" 30%, if you're lucky. You should tithe another 10% (we will definitely explore tithing in another series of articles on this site), or at least designate 10% of your income for charity - or BOTH! - and you should save (including investments) 10%. Adding the minimums there, 30% for taxes, 10% for charity, and 10% for savings, that only leaves you half your income to live on. 

"But David!" you wail. "I can barely make it on what I get now! How on earth can I afford to save 10% out of my income?"

That's a personal financial management issue, and we will get into that in yet another series of articles here. But bottom line, you can. Trust me on this one. If you simply take the 10% off the top, have it taken out of your check before you ever see it, you might not even miss it. Then again, you might, but I promise you this - ten or twenty years from now, you'll be very glad you did. 

So that answers the question of  should you invest. No question: YES!

The next thing you need to decide, is HOW to save this money.

For people getting started with putting money aside, there are many possible ways, but only three main ways most people get started. 

Their first impulse is to put it into a bank savings account. This is certainly better than not saving any money at all, and if you're only able to save $10 a week, this might be the way you have to get started. But you can do better. 

The other two main methods involve opening an investment account. Many investment accounts require a certain minimum startup amount, and this can be as high as $5,000. Most investment accounts, however, require much less, some as low as $250 or even $50.

There are some investment accounts that you can start with only $50 or less, if you agree to have regular deposits into the account deducted from your paycheck. I definitely advocate having regular investment deposits deducted from your paycheck if you can. 

The two main kinds of investment accounts are Managed Accounts and Self-Directed Accounts.

Managed Investment Accounts

With a Managed Investment Account, you essentially turn over all your money to an investment manager and forget about it. 

The good part of this is that you don't have to do anything else. You don't have to worry about keeping up with it. You just watch your account a couple times a year and see what happens.

The bad parts of this are (a) you will pay your account manager a commission, usually for each trade he makes in your account; and (b) if you get a bad account manager, you may not realize it until your money has dwindled badly. 

Just like with any other aspect of investing, picking a managed account manager is a risk. You might get a good one, you might get a bad one. Just like with any other aspect of investing, it will pay you to do your research on this before commiting.

Self-Directed Accounts

With a Self-Directed Account, you are in charge. This means you have to watch your investments, and you need to actively change them when you see it's time to do so.

The bad part of this is that it requires a lot more work on your part -- usually a half hour or more a week instead of an hour every six months or so for a managed account. If you fall down on this part of the job, you stand a chance of losing some of your equity or missing out on some great opportunities. 

The good part of this is that if you're willing to learn some rather simple concepts and diligently devote that half hour per week to your investments, there's no question you will make far more return than 90% of the managed accounts out there.  

This series will focus mostly on self-directed accounts, mainly because with managed accounts, you just pay 'em and forget 'em. This series will help you understand how to manage your accounts, and how the forces behind investments work.

How You Manage Your Investments

When you're getting ready to "manage" your investments -- to take care of the money you're saving -- the first thing you must decide is your INVESTMENT GOAL.

Investment Goals

You have to decide where you want to be on the risk-return spectrum. Do you want SAFE investments, and want to avoid as much risk as possible, even if it means you only get 5% or less on your money? Or are you the kind of person who wants to do whatever you need to so as to mazimize your return? Are you willing to take a few risks so you can make 20% or even 40% or more on your money each year? 

Do you want to put your investment money totally aside for the future, so you won't be taking anything out of it for a while? Or do you want to try to establish an income? 

All of these things are possible (just not at the same time! Grin!). You just have to know what you want, then do a little study to determine which investment vehicles will best get you to your goals. 

Management Stragegies

In future articles in the series, we'll get into the details of buy-and-hold, dollar cost averaging, market analysis, timing strategies, and several other things. We will start out right here by giving you some quick definitions, so you'll have an idea of what these terms mean. 

Buy And Hold

This is the strategy in which people buy an investment, perhaps some stock or shares in a mutual fund,  hoping this investment will rise in price and value. Once bought, these types of investors hold on to the investment until they need the money from it, then they sell. 

The biggest minus to this strategy is that if the market goes down, then the value of your invesment rides the downslope right along with the market. 

Dollar Cost Averaging

This concept is similar to buy-and-hold, but it adds the premise that you invest an equal amount of money to your account (and purchase an equal dollar amount of new investments) each month. Usually, this will run between $100 and $1,000 a month, depending on you. The premise is that when the market is down, you will buy more shares of the investment, and when it rises, you will buy future shares of the investment. In the long run, it averages out that you will have more shares at a lower price than if you'd bought a specific number of shares each month.

Market Analysis

We'll just touch on the definitions here, and go into more detail in a future article. Essentially, this means watching the market, what it does, and what the forces are that impact the market, and adjusting your investments accordingly.

There are two main types of market analysis. 

Fundamental Analysis watches the forces that might impact whatever industry your target investment is in. For example, if you are investing in technology, then the invention of a super-cheap display technology might have a big impact on your investment. If you are investing in Kellogg's or General Mills, then a huge surplus of wheat and sugar might impact that industry.

Technical Analysis is watching what the price of any given investment is doing, the ups and downs of the price. For example, if a particular stock has recently reached the lowest price in its history, does that mean a buying opportunity, or does it mean that company is going out of business? If the Acme Rotary Telephone Dial Factory stock price hit an all-time low, you might suspect that industry is in trouble. But if a company like Wal-Mart or Dell hit a 5-year low on their stock price, you might conclude that it's time to start buying their stock. 

Timing Strategies

There are people out there who will tell you that prices always rise or fall on a certain day of the week, or of the month, or related to the compay's earnings reports. There are even people out there who make a living relating the stock market to the lunar cycle!

Leave these alone. If you need to read a primer like this, you don't need to be loaded down with confusing strategies that sometimes I wonder whether they make sense even to the people who tout them.

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That's enough for now. In the next part, we'll get into some of the basics about the most powerful force in the whole world of investing. If you miss understanding this concept, you'll miss one of the most amazing miracles in the world.  

If you'd like to ask me a question, please use the Snicko contact page. I read them all, and I'll try to answer the most pertinent ones in this series of articles. 

Take care, and God Bless,

David