How do I know whether I should be investing in stocks/bonds/funds/etc? what factors would play into that decision? age?income? family situation? any help would be appreciated, thanks
Hi - The first question you would need to answer is what am I investing FOR? WHY am I investing? WHAT is my objective? If it is merely to "make money" I recommend you have a conference with yourself and come up with a more specific goal such as "I want to have an income of at least $2,000 per month during my retirement starting at age 65". Most of what we do every day is controlled by our subconscious mind and the subconscious mind does not respond to general thoughts or ideas but to specific goals and objectives. So only after you have determined the WHY should I invest (with as many specifics as possible) can you determine the HOW should I invest. HOW includes not only the type of investment (stocks, bonds, mutual funds, etc) but what type of account/s should I use - 401k, IRA, Roth IRA, taxable account, etc.? Age is certainly a factor - the younger you are the more aggressive you can be as you will have more time to make up for investing mistakes - because you will make mistakes. The most damaging mistake you can make is trading too much. Many investors are convinced they can "time the market" catching the up trends and avoiding the down trends. Surveys have been done that show that a large majority of the people in a given survey (regardless of the survey subject) think they are "above average" at whatever skill the survey is studying. It is mathematically impossible for the majority of people to be "above average" at a particular skill. Investing is no different. Your income could be a factor if all of your take home pay goes to household overhead. This probably seems obvious, but no one should start an investing plan if it takes food off the table. A spending plan can help anyone get a handle on income and expenses and saving and investing should be a part of any spending plan. "Family situation" is too broad to consider here - that could mean anything. To sum up, you want to determine WHY you are investing before proceeding to the HOW.
In addition to knowing Yourself and Why you are investing I add the following. Know the time horizon for your goal. If your goal needs to be realized in less than five years then avoid individual stocks and mutual funds than invest in stocks. The volatility of stocks require you to have a long-term time horizon.
Assuming your goals are long-term in nature your first big investing decision is "How much will I have in Stocks versus Bonds?" (For the purposes of this answer Stocks mean individual stocks, mutual funds that invest in stocks and ETFs that invest in stocks) That one decision determines over 90% of what you will experience in a given portfolio. It is called the Asset Allocation decision and its the most important one you'll make.
After you have decided what percentage of your money will be invested in stocks then you need to diversify. How much will be in US Stocks versus International? How much will be in Small Company Stocks versus Large Company Stocks? How much will be in Growth Stocks versus Value Stocks? Once you have the mix you desire what mechanism are you going to put in place to rebalance your portfolio from time to time? And, on what basis?
But, when starting out the best decision is To invest. Find an inexpensive ETF or Index fund and begin making automated contributions.
Rayner, Age, income, family situation, risk tolerance, investment time horizon, stability of income, financial needs and goals, the size of your investment portfolio and investment experience and expertise will all play a part in determining which asset classes you select for investment. Considering the nature of your question, it would appear that you are not an experienced investor. I would recommend that you consult with a local financial advisor for the answer that best meets your needs and objectives. You can invest in a number of global asset classes in just one good global, balanced mutual fund, however that may not be the best, most appropriate investment for you. Consult a financial advisor. Good luck.
Rayner, I agree with Rich that its important to determine what your risk tolerance, financial needs, and size of portfolio are. I am not one of those adviser's that believes you should have a certain percentage of your portfolio allocated to stocks, bonds, or cash based on your age. No where does it say that you have to be 30 years old and have 70% of your portfolio in stocks if that is outside of your comfort zone. Many people in this day and age are scaling back their exposure to risky assets like stocks and commodities because we just aren't seeing the roaring bull markets of the 80s and 90s anymore. Its important to find a balanced mix that works well for your risk tolerance and blends your objectives with the appropriate investments. I am a big fan of using low-cost ETFs and no-load mutual funds to build portfolios that are actively managed to reduce risk.
There's a common misconception among the advisor community that asset classes exist on a static risk and return spectrum. The conventional wisdom is that fixed income assets (bonds) are least risky and equities are most risky and that portfolios can be built around these principles to match the risk tolerance and objectives of an individual client.
While some elements of this logic are true, the conventional wisdom misses the important fact that price is the most important determinant of risk and return. In other words even the least risky stream of cash flows can become extremely risky at the wrong price, while the most volatile stream can become a safe bet at the right one.
Because market prices change constantly, the right mix of assets for an individual is NOT static. Proper investing requires being flexible and engineering a portfolio that truly matches the risk and return objectives of the client, while being prepared to act on changes in the investment environment