Investing 101

Once you have enough cash in your emergency fund (money market, savings, checking, etc.), the rest of your savings (retirement, future large purchases, university, etc.) should be invested.  Money that isn’t invested is eaten by inflation.  Let your money work for you!

Long-term mindset: Over time, the money should grow, but there will be times of loss.  One benefit of long-term investing is that you don’t have to worry about the market at all times like active investors because you are in it for the long-haul.  Every time I see tax returns of day-traders (who do it for fun, not professionally), they have huge losses.  If you’re not a professional, thinking in the short-term could result in huge losses.  Think long-term instead, and the gains should follow.  After all, you’re investing, not gambling.

Risk vs. return:  The higher the risk, the higher the potential gain or loss.  Some people take so much risk, that it’s the equivalent to gambling.  Gasp!  As a general rule, the younger you are, the more risk you should take since you have time to bounce back from losses.  However, if you’re going to panic, lose sleep, or constantly worry about the risk you’re taking, take less risk!  My grandfather told me that advice when I learned that I was (and am) risk averse.  He would have preferred that I invested in funds with more risk, but I chose balanced funds (stock and bond) instead.  Everyone has a different risk tolerance, and you should follow yours regardless of your age.  Today, my overall portfolio is riskier than when I started investing.  My two non-retirement mutual funds are balanced, and my two IRAs are riskier since they are 100% stock. My larger IRA is a Roth (which I love).

Mutual funds:  These are great ways to invest in stocks and bonds (and other securities) while letting the professionals worry about the day-to-day.  You sit back and relax, and they pay attention to the market.  Of course, you want to occasionally check on your funds to make sure they’re still the right ones for you.  If management or fund strategy changes for the worse, you might consider researching a new fund.  There are several types of funds such as stock only (some are riskier than others), bond only (practically no risk), mixture (various risk levels), index (consistent to overall market), and target-date (risk lowers as you reach your retirement date).

Mutual fund expenses:  There are so many great no-load funds, that there isn’t much of a reason to invest in loaded funds (fees in addition to a fund’s management and operational expenses).  No-load funds will still have expenses since the professionals working for you need to be paid, and many low-cost funds perform very well.  I’ve been very happy with the performance of my low-cost funds (expense ratios less than 1%).  High expense ratios can drastically reduce your earnings. If a fund is earning six percent, but the fees are two percent, your profit is four percent.

Research: A good place to start your research is morningstar.com.  You might need to set up a free account for some features, but many aspects are available without an account.  You can filter and search for no-load funds, see their historical returns, star rating (from 1 to 5), amount of risk, fund expenses, and much more.

Additional training: Morningstar has a free education course that provides more details of the basics.  During the course, you can hover your mouse over highlighted words to see definitions.

Disclosure: I am not a certified financial planner.  I learned about investing from my grandfather when I was a child.  I learned even more when I went to a university.  My advice is based on my experience as a non-professional investor.  In no way am I guaranteeing any kind of result with your investments.

I hope this helps those who are getting started with their investments!

Update: During a low-income year, I rolled my traditional IRA into my Roth IRA.

Linda 🙂

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