For me, September always evokes the pleasures (and some pains) of going back to school. I thought I'd start this academic year by doing a little educating of my own: investing fundamentals.
Part I will cover the basics of why we invest and what we invest in. Part II will discuss the "how": the basics of portfolio management, including asset allocation and diversification, along with measuring your progress, making adjustments, and dealing with volatility -- the need to keep emotions out of investing is harder than it sounds.
If you're just starting to invest, this should give you a foundation for future learning and the confidence to begin. If you're an old hand, I hope this material will inspire you to spend some time with your financial plan and portfolio. And, of course, the fact that we're in the midst of a particularly turbulent market makes sticking to the fundamentals even more important for every investor.
WHY DO WE INVEST?
We invest to build wealth for our future. Note the essential difference between investing and saving. Saving is what we do by making sure we're spending less than we earn; it's what powers our ability to invest.
Two other points before I delve into the basics of investing: First, understand that investing goes hand in hand with risk. In order to tap the potential of a meaningful return, you must put your money at risk to some degree (different people will take different chances). Second, when you invest money for long-term goals, you're going to give up some access to your money. With liquid investments like stocks and funds, you can always sell your stake if you need cash; however, if you need cash when the markets are down, you may have to sell at a loss -- not good!
You should consider establishing an emergency fund, several months' worth of living expenses, before you start pouring a large amount of money into an investment program. Note: As I've written before, if you can participate in a 401(k) with a match offered by your employer, always do that first; it's too valuable an opportunity to pass up. Then build your emergency fund, followed by investing.
WHAT DO WE INVEST IN?
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