Be The Captain of Your Investments
Investing can sound cool and exciting to some terrifying to others. And many of us jump into investments head first without due preparation, others run the opposite direction. Jumping in or running away is like setting sail out on the ocean without a compass, charts and sufficient provisions. Before you leave the harbor, you should have several tasks completed in advance.
I want to start investing. How do I start?
Investing involves risk. Before you take on risk you should have some savings built up in advance. Savings is your safe money, money that is not at risk of loss. It should be kept in a savings or money market account or a short term CD. It must be readily accessible in the event of emergency.
It is often said that bad things happen to good people. You should be prepared for these occurrences.
Therefore, you should first have accumulated 3 to 6 months of your monthly income before you start.
Is it ok to invest and take risk on while incurring a substantial amount of debt?
Not really, you should also be sure to have your short term debt paid off. This would include credit card and student loan debt. It does not benefit you to invest money when the rate of return is offset by your interest expense on a credit card. The damage can be worse if you incur a loss on your investments while paying a high interest rate on the same said credit card(s).
When we were in the bull market of the 80’s and 90’s it was often said and I actually heard it a couple times while waiting in line for groceries. “Oh, it is ok if I charge my groceries this week. I am making more money in the stock market.” That attitude hurt many people who in reality were not ready for the risk they took when the Dot Com bubble burst in 2000.
Is there anything else should I be concerned about?
Yes, you also should have adequate insurance if you are married and if you have children. Marriage and having children does not always go hand in hand anymore. The point is if you have someone else depending one you, it is necessary to have adequate insurance in the event you die too soon or become disabled.
Once you have an adequate amount saved, your short term debt is paid off and you have determined if there is the need for insurance, you can begin charting your course in investing. In other words, plan your investments. A friend of mine often repeated to me a statement his Rabbi would say to him as they were parting company. “Be sure to have all of your affairs in order . . . in the event we may not ever meet with each other again.”
Is there a method to investing? Should I be preparing for anything else?
Yes, you should set goals and time lines for those goals to be attained. What are you investing for, what are you trying to accomplish? Are you investing for retirement, a down payment on a house or a vacation house? You probably have multiple goals and varying time lines to accomplish those goals. You should write them down. Or enter them in a spreadsheet on your desktop or phone (our other brain).
Have your goals readily accessible and review them often. And this is our shameless plug. We have a fantastic planning tool available on our website that will put this all together for you. Either by desktop, laptop, notebook or phone.
Am I ready to begin investing now?
You are almost there, but you have another consideration before setting sail. You must determine your risk tolerance. Do not invest in the stock market just because your best friend, co-worker or neighbor tells you it is the best place to invest. You need to methodically decide how much risk you are willing to take on. Be truthful and trust your gut instinct.
How can I determine my risk tolerance?
Here is another shameless plug. We have available a risk tolerance questionnaire. It is a pdf document that you can download. There is no charge for the use of the Questionnaire. You do not need to forward the completed risk tolerance questionnaire unless you want to work with me or my firm. We say that because there are a number of fact finding questions that are not necessary if you do not wish to use our services. Otherwise, it is a handy tool to determine your risk tolerance.
We also have an extensive list of different types of risks and have defined them for you in our Glossary. Please read them.
Do I set up an account? Does my 401k at work count as an investment?
Lastly, the easiest place to start investing is your company retirement plan. Many companies provide a 401(k) and for smaller companies a SIMPLE IRA. This should be your first place to begin investing. You should do so regardless if you hate your job and or your company.
What if I do not plan on staying at the same company for very long? What if I do not trust my employer?
For every dollar you defer from your paycheck pre-tax you will make a minimum of 15 cents. You are probably wondering how I come up with this. Here is the math.
If you are working you are probably in at least a 15% tax bracket. If you contribute one dollar pre-tax that dollar cost you $.85. Therefore, you made $.15. If you divide $.15 by $.85 you will get 17.65% rate of return from the Tax Man.
If your employer matches a dollar for the dollar you contribute you make $1.15 which is 135.29% rate of return on your dollar contribution. This is why 401(k)s and SIMPLE IRAs are so popular and so important to take advantage of.
The rate of return is higher if you are in a higher tax bracket. And more so once you begin investing your contributions in the sub accounts or mutual funds made available to you.
Also, whether you trust your employer or not, remember, it is a federal crime to steal funds from a tax qualified retirement plan. An employer or business owner probably has too much to lose and very little to gain by taking your retirement funds.
Once you have all of the above items tucked in and put to rest, you are ready to start investing. And yes it is time to set up an investment account.