Tuesday, May 17, 2011

Risky Business

Stocks, bonds, mutual funds, ETFs……….So many choices, so little time. How is one to know where to put their funds when we are constantly bombarded by advertisements and talking heads saying this, and saying that?

I would first like to say, take EVERYTHING you hear and read about investing with a grain of salt. Let’s say for instance that you purchase a book about algebra. Upon completion of reading that book, it would be logical to assume that if given a test about algebra, you would be able to do pretty well.  You would think that once you indulge yourself with a certain amount of business news, you would get a general picture of what is going on. In my experience, that is not true. The markets don’t work in a way that is “predictable.” That is why it is dangerous to think that opinion columns are anything more than they are; they are just opinions. The only facts you can trust are the numbers.

Once you have blocked out the market “noise,” you can take a deep breath and breathe easy. You will need to do this because in order to figure out what good investments are best suited for you, you are going to need to do some serious soul searching.

When it comes to investing money in any capacity (stock market, real estate, collectables,) there are two primary objectives:
Be able to sleep at night (confidence in investments)
Maximize highest returns possible

Risk tolerance is a huge part of basic investing. Knowing your risk tolerance is very important. Typically risk tolerance can be gauged by age, but it can also be gauged by personality type. You never want to try to invest in a “home run” investment if it will cause you loss of sleep or regret. Any money you might make off this investment is irrelevant because it will all leave your pocket in the form of stress-induced medical bills anyway. So leave them alone.

It is a dark and scary world when you are just starting out investing if you know little or nothing at all. My first taste of investing in securities (stocks, bonds, etc.) was through my old employer’s 401(k). This particular 401(k) had limited investment opportunities. In hindsight, I am very thankful for that. It made it simple for a newbie to get their feet wet with the markets.

After the 401(k), I got an IRA (specifically, the Roth variety.) This basically opened Pandora’s Box for me. I had infinitely more investment choices than the 401(k), and infinitely more opportunities to lose money (which I did at first.) I had a pretty high risk tolerance, and I wanted to maximize my returns, but I hadn’t done my homework on what types of securities were good for me.

I am glad I was able to create my own “investment horror story” because I really learned a lot from it, and I would encourage you all to not get too bent out of shape when you have defeats.

So before you start thinking about what types of securities to invest in, do give considerable amount of thought to what type of person you are. It may also help to consult a financial planner or utilize other forms of resources. One resource I like is a risk tolerance test. It will help you look at yourself by asking you some basic questions. These types of tests are widely available on the net. Here is one to get started with, from one of my favorite magazines, Kiplinger (personal finance)

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