Investing – Step #11: Expect Fluctuations

If there’s one constant in the stock market, it’s that the stock market is never constant. It will continue to fluctuate every single day.
This means share prices are constantly rising and falling. Consequently, so do the market values of stocks and companies. This happens as a result of changes in the supply and demand for the stock.
To break it down further, when more people want to buy a certain stock than the number of people who want to sell it, the demand – and the stock’s price – will go up. However, when the sellers outnumber buyers, the price drops.
The obvious question, then, is: What makes people want to buy or sell a stock?
There’s no one answer to this loaded question. Stock fluctuations can be caused by any number of factors.
Here are some reasons a stock may go down:
  1. Earnings are dropping
  2. Sales are slipping
  3. A top executive leaves the company
  4. A well-known investor sells their shares of the company
  5. A lawsuit is filed against the company
  6. A market analyst downgrades their recommendation of the stock
  7. The company loses a major customer
  8. Many people sell their shares of the company
  9. A company factory burns down
  10. Other stocks in the same industry go down
  11. Another company introduces a better product
  12. There’s a supply shortage and the company can’t meet demands
  13. Scientists discover that the product isn’t safe
  14. A new law impacting sales or profits is introduced
  15. Negative rumors begin to circulate
  16. Local acts of terror cause uneasiness
  17. Concerns over inflation or deflation
  18. Fluctuating interest rates
  19. Technological changes
  20. Natural disasters
  21. Extreme weather fluctuations
  22. Negative company reviews on social media
  23. Political elections cause directional uncertainty
Here are some reasons a stock may go up:
  1. Increases in earnings and sales
  2. The company is under great new management
  3. An exciting product or service is introduced
  4. The company lands a big contract
  5. There’s a great review of the company, or new product, in the press or social media
  6. Scientists discover the product is good for something else
  7. A well-known investor is buying shares
  8. Many people are buying shares
  9. An analyst upgrades their recommendation for the company
  10. Other stocks in the same industry go up
  11. A competitor closes shop
  12. The company wins a lawsuit
  13. The company expands globally
  14. The industry is hot
  15. The company’s product is in high seasonal demand
  16. Positive rumors or speculation
  17. Optimistic market conditions
  18. A fantastic marketing campaign
This is just a small sampling of some factors that can make a company’s stock go up or down. It can happen for any reason at all. What’s important to remember, though, is that investing will never be a smooth ride – fluctuations are a normal part of the market. No shareholder is immune. Be prepared for your stocks to fluctuate, sometimes dramatically. When it happens, unless conditions in the market are extreme, you simply need to hold on and wait for things to change course.
Have you ever drastically changed your opinion about a company because of rumors or bad press? What about other reasons? Share your story with us in the comments!
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Investing – Step #10: Diversify Your Portfolio

Just as location is super important for real estate brokers, diversification is equally important to financial advisors. That’s because it’s key to successful investing.

You may be satisfied with the returns your equities are providing. However, you can never be certain of the market’s pattern, regardless of how well a specific sector is doing. That’s why a well-diversified portfolio is crucial. As always, a good offense is your best defense: The time to diversify is before it becomes a necessity.

Here are three easy ways to make diversification happen:

1.) Spread the wealth over economic sectors, styles and sizes

You may have discovered the best equity in today’s market. Nonetheless, you should never put all your investment funds in one stock or in one sector. Instead, create your own mutual fund by investing in a variety of companies and sectors.

Be wary of too much concentration in any single stock or sector. If you’ve purchased shares in 20 single industry-related stocks, your eggs are all in one basket, because you’ve only invested in stocks that are similar. Broaden your investments to include other economic sectors, or even foreign stocks and bonds or real estate.

It’s also smart to diversify your holdings among small- and large-cap companies. You may have chosen your preferred style and allocated most of your money there, but you can still broaden your portfolio by investing in other sized companies, styles and sectors.

2.) Consider index and bond funds

Spreading your money over different economic sectors can be expensive. The way to do it inexpensively is to purchase an index fund, which tracks an entire index for you at an affordable price.

Owning bond funds will add even more diversification to your portfolio at no risk.  Even within bond investments, remember to diversify. Consider investing in bonds with varying maturities and credit qualities.

Remember, you want to mix up your portfolio as much as possible.

3.) Keep building

Even if you’ve adequately diversified your portfolio, that doesn’t mean you can forget about it. Continue to add to your investments on a regular basis. This will help smooth out the regular peaks and bumps of the market.

It’s important to bear in mind that the goal of diversification is not to boost performance. It won’t guarantee against loss or ensure gains. What it will do, though, is help minimize loss in the event of a sharp market decline and improve your returns for your specific level of risk and investment goals.


How diversified is your portfolio? Which sectors do you invest in? Share your chosen approach with us in the comments.

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Investing – Step #9: Start Investing!

Now that you’ve determined your risk factor, and have chosen your investment style along with a source of financial advice, it’s finally time to start investing beyond your existing retirement funds.

You may choose to start with a low-risk investment vehicle, such as a bond, a certificate or a money market fund. Or, you may decide you’re ready for something a little more risky, like a stock.

Here’s a list of investment vehicles and what you need to know about each choice. Our list begins with the lowest-risk options and progressively gets riskier. Find the vehicle that most suits your needs and personality, and then start investing!

1.) Bonds

A bond is essentially a loan to a company or to the government. Suppose the city you live in wants to build a park. The city may choose to sell bonds to fund this project. In exchange, they will make regular “coupon” payments at a fixed percentage to all investors. At the end of the bond term – typically 10 years – the city will pay back the initial investment. Thus, a bond holds no risk to the investor and a guaranteed promise of growth.

Bonds have a noticeable lack of the volatility that is common in stock investments. However, because of the minimal risk, there is also minimal growth. Your gains are fixed and not dependent on the success of your investment. While it’s not as exciting as a stock that has the potential to earn you huge returns, a bond is nonetheless a safe, secure place to start investing.

2.) Share Savings Certificates (similar to CDs)

A share savings certificate (aka, certificate) is like a certificate of deposit. It is the most straightforward investment you can make. You can even set one up at UCCU!

With it, you are trading in the right to withdraw your money for a specific length of time while it is on deposit with a financial institution. In return, you receive a set dividend rate for that period, and it is not subject to change, regardless of what happens to general interest rates.  You are required to keep the money in the certificate until maturity of the term length. Withdrawing cash early will net you a penalty that is generally equal to three months’ worth of dividends.

The amount you’ll earn with a certificate is dependent on the term and the rate being paid at the time of account opening. However, even if current rates are low, if you lock in your money for a while, you can earn more than a general savings rate, making certificates a great low-risk investment.

3.) Money Market Funds

When you buy a money market fund, you are buying a pool of investments, automatically creating diversification and minimizing risk. Typically, a money market fund will include CDs and short-term bonds, along with other low-risk investments. They are usually sold by brokerage firms and mutual fund companies.

Unlike CDs, money market funds are liquid, which means you can withdraw your deposits without waiting for a maturity date.

4.) Dividend-Paying Stocks

Many well-established companies pay dividends on their stocks that are higher than what you can get on safer investments like CDs . As stocks, though, they are naturally not as safe as fixed-income securities.

Dividend-paying stocks are a great option because they combine a fixed income with the possibility for growth. Also, in case of a declining market, you can still earn income from your stock, even when the price of your shares fluctuates. They are often the ideal choice in a bear market, which is when investors look toward income-producing stock over growth.

5.) Stocks

If you feel ready to dip into the general stock market, there is still some work you should consider. Before you plunk down your money, carefully research your chosen company. Don’t buy a single stock without having a clear understanding of that company’s current financial situation.

You can begin your research with some of these resources:

  1. The company’s annual report
  2. The 10K and 10Q reports that the company files with the SEC

3. Standard & Poor‘s Stock Reports

Value Line Investment Survey

5. The Wall Street Journal and/or Investor‘s Business Daily

If you find leafing through a newspaper or reams of a report to be tedious, you don’t have to resort to blind investing. With the information superhighway, research is easier than ever. The following list of resources are available online and will clue you in to your company’s financial standing:

1.                  Bloomberg

2.                  Financial Sense

3.                  Forbes

4.                  King World News

5.                  MarketWatch

6.                  The Ludwig von Mises Institute

7.                  Nasdaq

8.                  The U.S. Securities and Exchange Commission

Your Turn: Outside of retirement, what was your first investment and how did it fare? Share your experiences with us in the comments!

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Investing – Step #8: Find a Financial Adviser

Investing advice is everywhere! It’s on TV; it’s all over the internet; it’s in newspapers and magazines and it fills the pages of dozens of books.

With this overabundance of information, you’d think nearly everyone would be financial experts. Actually, though, financial genius eludes most people and they’re wanting professional advice.

Think you can’t afford such advice? Think again. There’s investing advice available to suit every taste, and for every budget . Here’s a small sampling of investing resources for you to check out:

1.) 401(k) plan advice

One option might be a lot closer than you think: your workplace. While you may already be taking advantage of your employer-sponsored retirement plan, you might not know – or you might not be using – the free or discounted advice your company offers from the plan provider. Ask your employer before searching for an adviser of your own.

2.) Financial advisers

The default option for investing advice is also the most expensive. Financial advisors will expertly manage your portfolio, but they come with a hefty price tag. Many advisors take a percentage of the assets they manage, generally one percent, which can amount to more than you want to pay. Alternatively, they may be paid through a retainer on their services. Both payment systems can be costly and are usually only the option of choice for high-end investors. In addition, many financial advisors will only work with a minimum investment (typically $500,000) that might be way above the amount you plan on investing. Those who do work with less money often charge double the going rate in annual fees.

3.) Roboadvisers

Fortunately for those with a smaller net worth, there are excellent options. One popular choice for affordable investment advice is the roboadvisor. Essentially, a roboadvisor is an algorithm. You give it your basic background and tell it a bit about your financial goals, and it recommends an asset distribution based on those factors.

Here are some ways a roboadvisor compares with a human advisor:

  1. Cost. Most roboadvisers bill on an assets-under-management scale: The more you’ve invested with them, the more they charge you. In contrast, a human adviser will also charge for time spent in meetings, preparing reports and other tasks related to managing your account.
  2. Quality of advice. Most financial advisers, both human and automatic, subscribe to Modern Portfolio Theory, which posits that markets tend to increase in value over time. This theory is easily reducible to an algorithm, and therefore the quality of advice offered by a roboadviser tends to be nearly identical to that of a human adviser.
  3. Personalization. Roboadvisors give one-size-fits-all advice. If you have a major life event impacting your financial status, such as an unexpected raise, the roboadvisor won’t know that. You’ll need to input all your information again and start over.
  4. Accessibility. The fact that roboadvisers are only available online can be both a blessing and a curse. It’s convenient if you’ve got easy access to a Wi-Fi signal, but not so much if you live somewhere that doesn’t have a reliable signal.

4.) Hybrid service

If you like the low cost of a roboadvisor, but don’t like the idea of trusting a machine with your investments, you might want to consider a hybrid service. It gives you the best of both worlds. A hybrid service offers automated features, like the roboadvisor, with the option of speaking to a flesh-and-blood advisor when nothing but the human touch will do.

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Investing – Step 7: Find Your Investing Style

Now that you have successfully determined how much of a risk-taker you are, it’s time to choose an investing style that best suits your personality, your needs, and your financial standing.

First, you’ll need a basic understanding of the major investment styles available in today’s market. These styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies. Study each category to determine which style best suits your needs.

1.) Active or Passive Management

When choosing your investment style, your first question is going to be how much trust you’re comfortable placing in financial advisors.

If you’d like to have professional money managers carefully select your holdings, along with a full-time staff of financial researchers and managers constantly seeking to gain larger returns for you, active management is the style for you. Of course, you’ll have to pay for those financial experts to work on your investments, but hopefully, the greater returns you’ll get will make the expense well worth it.

If you don’t think a team of professionals will do enough for your investments to justify the high cost, you might choose to be a passive investor instead. In fact, empirical research supports this style – it shows that many passively-managed funds actually earn better returns over the long run. You’ll need to do more of the legwork yourself this way, but your expenses will also be much, much lower.

2.) Growth or Value Investing

The next question you’ll need to consider is whether you prefer to invest in fast-growing firms or in underpriced industry leaders.

Those using the growth style of investing, will choose firms with high earnings, high return on equity, high profit margins, and low dividend yields. The reasoning behind this choice is that a firm earning in this pattern is likely to be an innovator in its field and will continue earning high profits.

Since it is currently growing at a fast pace, such a firm will reinvest most – or even all – of its earnings for fueling further growth. As an investor, you want a chance to be part of that growth, even if it means paying a higher price-to-earnings ratio.

In contrast, the value style of investing is focused on buying a strong firm at a good price.To be considered a value investment, a firm must have a low price-to-earnings ratio, low price-to-sales ratio, and a higher dividend yield.

3.) Small Cap or Large Cap Companies

The last question you need to ask yourself, is whether you want to invest in small or large companies. In investing lingo, the measurement of a company’s size is referred to as its “market capitalization” or “cap” for short. Market capitalization is the number of shares of stock a company has outstanding, multiplied by the share price.

Some investors prefer small-cap companies because they believe these companies can deliver better returns as they are more flexible, and have more opportunities for growth. As is usually the rule in the market though, the potential for greater returns comes with heightened volatility and greater risk. In comparison to large firms, small firms have fewer resources and a less diversified business line. Share prices of the company can therefore fluctuate dramatically, generating larger gains but also generating larger losses. If you’re comfortable with risk and like the potential for greater growth, this is the style for you.

If the thought of putting your money into a smaller company makes you uneasy, consider investing in a dependable, large-cap company. The names of large caps include some big firms you’ll be familiar with like Microsoft and Exxon Mobil. These companies are well-established and stable; you don’t have to worry that they’ll suddenly go out of business and leave you in the lurch.

On the flipside though, these companies are already so large, that they may have reached their capacity for growth and don’t have much more room for expansion. Investors putting their money into large caps can anticipate lower returns, but also less risk.

Review these three dimensions of investment styles until you can determine which choice from each category suits you best. When you have chosen one from each dimension, you’ll know your investing style. This will enable you to pick the investments that you’ll be comfortable holding onto for a long time.

Your Turn: What kind of investor are you? Share your style with us in the comments!

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Investing – Step #6: Determine Your Risk Tolerance

You know that deciding to invest some of your money in the market automatically means you’re setting yourself up for possible loss.

But how much losing can you take? Does the thought of your stocks plunging make you sick to your stomach? Or are you a genuine thrill-seeker who loves the rush of adrenaline you get when you think about putting your money somewhere shaky?

Determining your risk tolerance is an important step to take for ensuring you’re completely comfortable with your investments. You might also come across trade recommendations that are discussing options based on different risk tolerances.

While your risk tolerance will change according to your age, income requirements and financial goals, there is no fixed label for those who fit certain criteria. There are simply too many variables. For example, most people think that the younger you are, the more of a risk-taker you’ll be. They reason that the years ahead afford you the freedom to take more chances with your money. While this may be true in general, it is not a fixed rule, and determining your risk tolerance depends on several variables besides age.

So, how do you determine your risk tolerance? Consider the following before answering the question:

1.) Time frame

The first factor to determine is the actual length of the investment horizon. When will the funds be needed? Even a younger investor can have a short-term horizon if they’re trying to earn enough capital for a goal they hope to fulfill in the near future, such as buying a house. If the investment horizon is indeed short, the risk tolerance should shift toward being more conservative, regardless of the investor’s age. For long-term investments, there’s room for more aggressive investing.

If you’re an older investor, don’t fall into the trap of thinking that, just because you’re pushing 70, you need to move everything into conservative investments. This may be suitable advice for some, but it’s not recommended as a one-size-fits-all approach. For example, a retiree who has sufficient funds to live off the interest without touching the principal can safely invest in volatile stocks. Also, with today’s growing life expectancy, a 70-year-old investor may still have a 20-year investment horizon – or more! When determining your risk tolerance, be sure to consider your actual time horizon, irrespective of age.

2.) Risk capital

An obvious factor of your risk tolerance is going to be how much money you have available to put into the market. What is your net worth? To find this number, simply add all your assets and subtract your liabilities. Risk capital is defined as the amount of money you have available to invest or trade that will not affect your lifestyle if it is fully lost. It is also referred to as liquid capital, meaning assets that can easily be converted to cash.

Naturally, an investor with a higher net worth will be able to take more risk. The smaller the percentage of your overall net worth the investment represents, the more aggressive the risk tolerance can be.

Unfortunately, those with little or even no net worth are often attracted to riskier investments because of the lure of quick and large profits. Bear in mind, though, that when too much risk is taken with too little capital, a trader can be forced out of a position too early to make the investment worth it.

On the other hand, if an undercapitalized trader using limited risk instruments “goes bust,” it shouldn’t take that trader long to recoup the losses. Contrast this with a high-net-worth trader who throws caution to the wind and puts everything into one risky stock and loses – it will take this trader a lot longer to recover.

3.) Investment objectives

Your investment objectives are another important factor in determining your risk tolerance.

Are you saving toward a specific goal? Are you investing your child’s college fund with the hopes that it will grow? Are you trying to earn enough to support your retirement? If your goal is to raise enough capital for a pressing need, you will likely be more risk-averse. Or, you may be so desperate to raise those funds that you’ll make some hasty decisions.

On the other hand, if you’re simply trying to increase your net worth with extra capital, you’ll probably be more open to investing in riskier stocks.

Knowing your risk tolerance goes beyond being able to sleep at night without stressing over your investments. Ultimately, knowing your risk tolerance – and sticking to investments that fit within it – should keep you from complete financial ruin and allow you to invest with a clear head.

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Investing – Step #5: Learn The Costs Of Investing

The ultimate goal of investing is to let your money work for you and provide you with stable, passive income.

But it costs money to invest money.

This month, take the time to learn the dollars and cents of investing. Of course, you knew that investing was going to mean coming up with the actual money you’re putting into the market, which always holds the possibility of being lost forever. But did you know there are going to be various fees, commissions, and taxes you’ll have to pay, too?

Let’s take a peek at an actual investment to illustrate this. The company and amounts have been changed, but they’ve been accurately scaled down to size.

Suppose that, on Aug. 13, 2015, a share of stock in Apple closed at $43.26. During the next few months,
Apple issues four dividends of $0.55 per share. On Aug. 25. 2016, a share of stock in Apple closed at $51.23.

Let’s say you chose to invest $1,000 in Apple on Aug. 13, 2015 and you withdrew it on Aug. 25, 2016.

At the time of your investment, $1,000 would buy you 23.25 shares of Apple. Over the year, you would have received $51.16 in dividend payouts. When you withdrew from the company a bit over a year after your initial investment, you’d sell that stock for $1,191.09.

It seems like your gain from this stock is $242.25, broken down into $51.16 in dividends and another $191.09 from selling the stock. Simple, right?

The problem is, though, you haven’t exactly earned that much. Here’s where the costs of investments come into play.

First, the dividends would be subject to income tax. In this case, the dividends are considered qualified dividends, and would therefore be taxed at a rate of 15% by the federal government and possibly more by state and local sources. As a result, $7.67 of that dividend gain is eaten up by these taxes.

Second, you’re going to have to pay your broker for the cost of buying and selling the stock. Let’s say, hypothetically, you’ve used an online discount stock brokerage firm. The buy and the sell would each cost $9.99. That’s another $19.98 dropped from your gain – although this fee is tax deductible.

Third, the gain on the sale would be a long-term capital gain, so 15% of that gain goes to the federal government. Since your gain was $191.09, you’d be paying an additional $28.66 in taxes on the sale.

In total, your expenses for your gain add up to $56.31. Just like that, nearly 30% of your gain is gone!

Even if your investment is a loser, you’re still paying the brokerage fees and will earn less in dividends.

The moral of the story? Investing costs. You’re taxed if you gain, and you’ll get hit with brokerage fees whether you win or lose.

Some forms of investing have lower costs than others. If you invest directly with an investing house, you can bypass the investing fees and only pay the taxes on your gains. However, you’re limited to the offerings that the investing house has available, and you’ll be subject to their often inflexible minimums for investing.

You could also simply invest in a money market account or other savings option at UCCU. Your returns will come with fewer or no costs. Plus, your balance isn’t at risk. Yes, you might “lose” some gains by only having the cash in a savings account, but your money is earning a steady return. If you invest elsewhere, it’s possible that the costs, the fees and the taxes can easily eat up a substantial amount of whatever you gain or make an already painful loss even harder.

It’s important to note that the bigger your investment, the smaller the impact such costs have. At the $1,000 level, the investment fees in the above scenario typically eat up about 2% of your balance. If you’re investing $10,000, the fees will only eat up 0.2% of your balance, and if you invest $100,000, the fees eat up only 0.02% of your balance.

Thus, as a beginning investor, it’s crucial to know the total cost of ownership of an investment as you consider it. Even a small fee can significantly lower your total return when you’re starting out with small investments.

That’s why it’s best to take it slowly at first and continue learning about the market and stocks you’re interested in. Know exactly what you’re going to invest in – and what all of the costs of that investment are – before you put down any of your money. After working out the math, you may find you’d rather wait until you have a substantial amount saved up for investing, as these fees don’t make such a big dent when the gains are larger.

So, before you make that first investment, learn the costs and be sure it’s worth the price!

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Investing – Step #4: Invest 15% Of Your Household Income Into Retirement

Now that you understand the basic investing terms, your first actual investment is going to be one in your future. Experts recommend allocating 15% of your monthly income toward retirement.

Before you start exploring your options, though, you’ll need to set a goal, or a target number. This number will represent how much you need to have saved for living comfortably and independently throughout your retirement. A good way to set a target number is to take your current living expenses and multiply that by 400. This will give you the amount you’d need to have to sustain yourself, based on a 4% investment return.

There are many investment options to consider for retirement. The most common are 401(k)s, IRAs and Roth IRAs, each of which have their own strengths and weaknesses.

Here’s what you’ll want to look for:

1.) Matching funds

This refers to matching monies offered by employers. Most will offer to match your contributions up to a certain limit. For example, your employer may offer a 100% match on the first 3% of your salary. If you earn $60,000, that means for the first $1,800 you have withheld from your paycheck and put into your retirement account, your employer will gift you an additional $1,800 in completely tax-free money. Even if all you do is park that money in something stable like a trust fund, it’s the highest, safest, most immediate return you can earn anywhere in the stock market. Don’t leave free matching money on the table!

2.) Tax-deferred growth

If a retirement vehicle is tax-deferred, this means all the assets parked in that particular fund will not be taxed until they are withdrawn. This allows the money to grow, untouched, for years.

3.) Tax-deductible

If a retirement fund is tax-deductible, every dollar you put into that fund is subtracted from your taxable income, automatically lowering your taxes. For those in their peak earning years, this can provide considerable tax savings.

In the table below, we offer a brief summary of the pros and cons of each retirement vehicle for easy comparison.
Features/requirements 401 (k) IRA Roth IRA
Matching Funds Yes No No
Tax-deductible Yes Depends on income, tax-filing status and other factors No
Tax-deferred Growth Yes Yes No
Taxable Withdrawals Yes Yes No
Maximum Yearly Contribution (2017) $18,000.00 $5,500.00 $5,500.00
Maximum Yearly Contribution Age 50+ (2017) $24,000.00 $6,500.00 $6,500.00
Age Limit For Contributions None 70 1/2 None
Income Eligibility (2017) Any income earned through a company that offers a 401(k) Any earned income as reported on a W-2, wages from self-employment, tips and alimony Any income with a gross worth of less than $118,000-$133,000/yr or $186,000-$196,000/yr for taxpayers filing jointly

Once you have chosen your retirement fund, you’ll need to choose somewhere to invest the money. Low-risk investment vehicles, such as federal bonds or trust funds, are usually the best choice.

If you are saving for retirement through the use of a 401(k), be sure to check if your employer offers a target date fund.

The term “target date” refers to your planned retirement date. You’ll know your employer offers a target date fund if there’s a calendar year in the name of the fund, such as A.J. Holdings Retirement 2050 Fund. Simply make an estimated guess of the year you’d like to retire, and then pick the fund with the date closest to your projected retirement.

A target date fund is a smart choice because it spreads the money in your 401(k) across many asset classes such as large company stocks, small-company stocks, bonds and emerging-markets stocks. Then, as you near the target date, the fund becomes more conservative, owning less stocks and more bonds, automatically reducing your risks as you near the date of your retirement.

To get the ball rolling on whichever retirement plan best suits your needs, you’ll need to speak to an HR representative at your workplace. With a bit of work and a lot of planning, you’ll have your future secured in the best way possible.

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Investing – Step #3: Educate Yourself

Now that you’re free from debt and are steadily building up your savings, you’re probably eager to get your money into the market as quickly as possible.
However, before going anywhere, you need to understand the lay of the land. First, there’s the language. There are hundreds of investment terms tossed around on Wall Street, and you’ll want to know what they mean.
Second, investing is a whole lot more than just “buy low and sell high.” Understanding the basic concepts that govern the market is key to being a successful investor. So, before you cut your teeth on your first stocks, take the time to learn all you can about investing.
You can start with some easy books. We suggest:
  • The Intelligent Investor by Benjamin Graham
  • The Essays of Warren Buffett
  • A Random Walk Down Wall Street by Burton Malkiel
  • The Bogleheads’ Guide to Investing
You may also want to browse through these online guides and resources:
  • the BlackRock Blog
  • the Money Tree Investing Podcast
And finally, here are 25 important investing terms along with their basic definitions to help get you started:
  1. Ask: The lowest price an owner is willing to accept for an asset.
  2. Asset: Something that has the potential to earn money for the owner.
  3. Asset allocation: An investment strategy that balances risks versus rewards by adjusting the percentage of each asset in your portfolio by asset class. This limits some of your risk by allocating your portfolio according to your particular risk tolerance, goals, and investment time frame.
  4. Balance sheet: A statement showing what a company owns, the liabilities the company has, and the company’s outstanding shareholder equity.
  5. Bear market: A market that is falling.
  6. Bid: The highest price a buyer is willing to pay for an investment.
  7. Blue chips: Companies that have an established history of good earnings, good balance sheets and regularly increasing dividends.
  8. Bond: An investment that represents what an entity owes you. Essentially, you lend money to a government or a company and you are promised that the principal will be returned along with a predetermined interest value.
  9. Book value: The number reached if you would take all the liabilities a company has and subtract them from the assets and common stock equity of the company.
  10. Broker: The entity that buys and sells investments on your behalf, usually for a fee.
  11. Bull market: A market that is likely to gain.
  12. Capital gain (or loss): The difference between what you bought an investment for and the amount for which you sell it.
  13. Portfolio diversity: A portfolio characteristic that ensures you have more than one type of asset and/or are buying investments in different sectors, industries or geographic locations.
  14. Dividend: A distribution of a portion of a company’s earnings to its shareholders. Dividends can be paid only once, or they can be paid more regularly, such as monthly, quarterly, semi-annually, or annually.
  15. Dow Jones Industrial Average: An average of a list of 30 blue chip stocks.
  16. ETF: A bundle of stocks managed by a professional investor.
  17. Exchange: A place where investments, including stocks, bonds, commodities, and other assets are bought and sold.
  18. Index: A tool used to statistically measure the progress of a group of stocks that share characteristics.
  19. Margin: Borrowed money used to make an investment.
  20. Market capitalization: The number you would get if you multiplied a company’s current share price by the number of shares outstanding.
  21. NASDAQ: A stock exchange that focuses on trading the stocks of technology companies.
  22. New York Stock Exchange: One of the most famous stock exchanges, the NYSE trades stocks in companies all over the United States and in some international companies.
  23. P/E ratio: This measure reflects how much you pay for each dollar that company earns. The higher a P/E ratio is, the higher the earning expectations.
  24. Stock: A piece of a company. Companies divide their ownership stakes into shares, and the amount of shares you purchase indicates your level of ownership in the company.
  25. Yield: The ratio between the stock price paid and the dividend paid, measured as a percentage.
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Investing – Step #2: Start Saving

Don’t invest a penny before you build a substantial savings account.

This might sound counterintuitive to a wannabe investor, but it’s important to have a solid cushion of savings before you start putting your money into the market. Life is full of surprises. You don’t want to be caught in an emergency that leaves you desperate for cash when all your funds are tied up in bonds, CDs and stocks.

This month, work on building up your savings to minimize risk. Here’s how.

  1. Follow the 50/30/20 rule. Financial advisers suggest that 50% of your income goes toward necessities, like your mortgage, transportation and food costs; 30% goes toward discretionary non-essentials, like dining out, paying for a top-tier cellphone plan and updating your wardrobe; and the last 20% goes toward savings. If you begin dividing each paycheck automatically, you’ll launch a habit of saving that will greatly enhance your financial life.
  2. Put away three to six months of living expenses. Now that you are in the habit of saving, the next sensible step is to put that money toward something substantial. Experts suggest the first step of saving is building up an account that is large enough to cover your living expenses for three to six months. This will tide you over in case there’s an unexpected event that keeps you from earning your regular salary. That may be an illness, your company downsizing or anything that leaves you suddenly unemployed. Calculate exactly how much you need to live on each month, and start saving. Then, even if the unthinkable happens, you won’t be up a creek without a paddle.
  3. Build up a series of cash reserves – including an emergency fund. Aside from living expenses, it’s important to have accessible cash for those unanticipated events, like a major household repair or a medical emergency.

Your Turn: What steps have you taken toward building your savings this month?

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