Getting Your Fiscal Act Together
Although the decade began with a substantially down market, the leading stock market indexes have risen significantly. For investors, this is a good time to take stock of where we are and where we want to be, and plan how best to get there. What follows are a list of practical steps that can help all of us get our fiscal act together.
Periodically, it is a good idea to sit down and really figure out where you are with your finances. Pull out your banking and brokerage account statements, check your balances, and gather in one place all your fiscal information. Then take a good, hard look at what you see. If you have questions about the information presented on your brokerage or mutual fund statements, don't ignore those questions. Speak up, ask questions, and get answers.
After learning where you are, figure out where you want to be. What are your savings goals? Are they long-term (retirement, college education for your babies) or short-term (down payment on a house, college education for your high-school age kids)? Your goals determine your own personal tolerance for risk. If you'll need your money in the short term, more conservative investments are appropriate. If you're saving for the long haul, you might decide to take more risks. Just remember - your risk tolerance is a very personal matter, based on your age and your personal savings goals. Your neighbor or your Uncle Fred may be much more conservative or aggressive than you are. But that doesn't mean their investing strategy is right for you!
2. Invest For The Long Term
Before you invest, make sure you have enough money to eat and put a roof over your head. Pay yourself first - get rid of high-cost credit card debt. But the earlier you get a start on your savings goals, the less you'll have to put away monthly to reach them. Historically, the investment that has provided the highest average rate of return over the long term has been stocks. But there are no guarantees of profits when you buy stock. Markets go up and markets go down in the short-term. That's why it is best to think long-term when considering stock market investments.
There is no better way -- over the long term -- to distribute risk than to diversify your investments. It is true that in some years, single stocks or individual sectors will outperform a diversified investment strategy, at least in the short term. But don't forget that investors who hope to gain fantastic returns by investing in a single stock or one sector have also assumed the higher risks of a more narrow investing strategy. While diversifying your investments won't bring you sky-high returns in boom times, it also means that you won't lose everything when the boom times bust.
One way to diversify is to consider mutual funds. And here is where a little work can pay off handsomely - be sure to pay attention to a fund's fees and expenses. Over time, expenses and fees can really make a difference. On an investment held for 20 years, a 1 percent annual fee will reduce the ending account balance by 18 percent.
Another way to diversify is to make sure that your retirement funds aren't all invested in your employer's stock. Even if that stock is a good long-term prospect, it is risky to have your retirement security depend in whole or in large part upon the fate of any one company.
4. Know Yourself
Be honest. Do you really have the time and energy to adequately research individual stock investments? Most of us don't have the experience and expertise of Wall Street traders who read financial statements for a living. It is important to be realistic about your own time commitments. Talking to co-workers and watching TV is not good investment research! That's why many Americans begin investing not with individual stock picks, but with a broad based, low cost index fund. That way you're broadly diversified from the beginning. As you find more time and gain confidence, you'll know whether you've got the desire or interest to select individual stocks.
5. Do Your Homework
You owe it to yourself to check out any investment and investment professional with whom you do business. A few simple steps can save a great deal of heartache.
Before doing business with any investment professional, take full advantage of the power of the internet to check computerized databases for disciplinary information. Then contact your state securities regulator to find out if they have any additional information.
Before buying any stock, check out the company'sfinancial statements on the SEC's website. All but the smallest public companies have to file financial statements with us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances can open the door to fraud.
Before purchasing any investment, make sure you read and understand all the disclosures you're given. The federal securities laws require that you be given lots of helpful information, such as a prospectus for a mutual fund, but you'll have to take the initiative to understand what you're given.
It's up to you to educate yourself to make sure that all of your investments match your goals and tolerance for risk. Don't be afraid to ask questions - it is your money!
6. Protect Yourself
Always remember that people who sell investment products make money by doing so. Which doesn't mean that they'll give you bad advice, but it does mean that you've got to take responsibility for evaluating any recommendations you get. We advise people to never rely solely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock. Instead, do your own research-such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC-to confirm whether a particular investment is appropriate for you in light of your individual financial circumstances. Don't buy any investment product you don't understand. And remember, any investment promising high returns necessarily carries a high risk that you'll lose your money.
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