Your Money & Business
Ready to Invest in the Financial Markets?
May 2018
By Nancy Burger
What do you have to know to invest in the financial markets? That you have absolutely no idea what they're going to do on any given day. But that doesn't mean you shouldn't invest. It DOES mean that you should approach investment with the right mindset.
I'm still surprised when, upon learning that I write about finance and the stock market, how many people ask me questions like, "What do you think Facebook will do? " or "Should I buy Apple?"
The answer? No one knows what a stock will do from one moment to the next.
Sure, there are market gurus who spend most of their time studying the vagaries of the financial markets, those who pour over statistical analyses about what certain types of financial instruments tend to do under certain market circumstances, keep an eye on what the Federal Reserve is planning or promising, track economic indicators, corporate earnings, the latest trade talk drama, etc. These folks also pay careful attention to the inner workings of companies - how they are managed, what their balance sheets look like, how they are maintaining (or losing) competitive advantage - all before most of us have lunch.
But even the most educated, up-to-date market gurus know what they don't know - how to predict what the markets will do next. Nobody does, and anyone who claims to have such prowess is selling you a bill of goods.
So, if you're interested in investing, there are several things to consider. The Securities and Exchange Commission (SEC) provides a comprehensive list as well as other resources and links that could be helpful. Here are some highlights:
Draw a personal financial roadmap: Take a look at your entire financial situation, then determine what your long-term goals are - either on your own or with the help of a financial professional.
Evaluate your comfort zone in taking on risk: All investments involve some degree of risk. If you intend to purchase securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your investment (called your principal). Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities typically is not federally insured, which means you run the risk of losing the total amount invested.
Diversify: The old adage "don't put all your eggs in one basket" holds true in investing. By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can help protect against significant losses. Historically, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time. Market conditions that bode well for one asset category often cause another to see more mediocre or poor returns. By investing in more than one asset category, you'll reduce your risk and be more likely to have a smoother ride over time.
Some risk is necessary: If you don't include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal. For example, if you are saving for a long-term goal, such as retirement or college, most financial experts agree that you will likely need to include at least some stock or stock mutual funds in your portfolio.
Consider dollar cost averaging: By making regular investments with the same amount of money each time, you will buy more of an investment when its price is low and less of the investment when its price is high. Dollar cost averaging keeps you from investing all of your money at the wrong time by following a consistent pattern of adding new money to your investment over a long period of time.
Rebalance your portfolio periodically: Rebalancing means returning your portfolio back to your original asset allocation mix (e.g. 60% stocks and 40% bonds). By rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset categories, and you'll return your portfolio to a comfortable level of risk.
Beware of fraud and scam attempts: "Scam artists read the headlines, too," according to the SEC site. "Often, they’ll use a highly publicized news item to lure potential investors and make their 'opportunity' sound more legitimate.” The SEC recommends that you ask questions and check out the answers with an unbiased source before you invest. Always take your time and talk to trusted friends and family members before investing.
I'm still surprised when, upon learning that I write about finance and the stock market, how many people ask me questions like, "What do you think Facebook will do? " or "Should I buy Apple?"
The answer? No one knows what a stock will do from one moment to the next.
Sure, there are market gurus who spend most of their time studying the vagaries of the financial markets, those who pour over statistical analyses about what certain types of financial instruments tend to do under certain market circumstances, keep an eye on what the Federal Reserve is planning or promising, track economic indicators, corporate earnings, the latest trade talk drama, etc. These folks also pay careful attention to the inner workings of companies - how they are managed, what their balance sheets look like, how they are maintaining (or losing) competitive advantage - all before most of us have lunch.
But even the most educated, up-to-date market gurus know what they don't know - how to predict what the markets will do next. Nobody does, and anyone who claims to have such prowess is selling you a bill of goods.
So, if you're interested in investing, there are several things to consider. The Securities and Exchange Commission (SEC) provides a comprehensive list as well as other resources and links that could be helpful. Here are some highlights:
Draw a personal financial roadmap: Take a look at your entire financial situation, then determine what your long-term goals are - either on your own or with the help of a financial professional.
Evaluate your comfort zone in taking on risk: All investments involve some degree of risk. If you intend to purchase securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your investment (called your principal). Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities typically is not federally insured, which means you run the risk of losing the total amount invested.
Diversify: The old adage "don't put all your eggs in one basket" holds true in investing. By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can help protect against significant losses. Historically, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time. Market conditions that bode well for one asset category often cause another to see more mediocre or poor returns. By investing in more than one asset category, you'll reduce your risk and be more likely to have a smoother ride over time.
Some risk is necessary: If you don't include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal. For example, if you are saving for a long-term goal, such as retirement or college, most financial experts agree that you will likely need to include at least some stock or stock mutual funds in your portfolio.
Consider dollar cost averaging: By making regular investments with the same amount of money each time, you will buy more of an investment when its price is low and less of the investment when its price is high. Dollar cost averaging keeps you from investing all of your money at the wrong time by following a consistent pattern of adding new money to your investment over a long period of time.
Rebalance your portfolio periodically: Rebalancing means returning your portfolio back to your original asset allocation mix (e.g. 60% stocks and 40% bonds). By rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset categories, and you'll return your portfolio to a comfortable level of risk.
Beware of fraud and scam attempts: "Scam artists read the headlines, too," according to the SEC site. "Often, they’ll use a highly publicized news item to lure potential investors and make their 'opportunity' sound more legitimate.” The SEC recommends that you ask questions and check out the answers with an unbiased source before you invest. Always take your time and talk to trusted friends and family members before investing.
Resources:
Questions You Should Ask about Your Investments (SEC)
Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions (SEC)
Mutual Funds and Exchange-Traded Funds (SEC)
Investment Guide: Bonds (InvestmentCanvas)
Questions You Should Ask about Your Investments (SEC)
Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions (SEC)
Mutual Funds and Exchange-Traded Funds (SEC)
Investment Guide: Bonds (InvestmentCanvas)
Co-founder Nancy Burger started her finance career on Wall Street in the 1980’s and now works as a freelance analyst and writer for a money management firm. She has contributed to articles that have appeared in Forbes.com, Nasdaq.com, TheStreet.com and CNBC.com.
