all about How To : Are You Making Investing Too Complicated?

Are You Making Investing Too Complicated? A common question I receive is, “Investing seems so complicated and risky. How do I get started and what are the best investments to make?”

While investing can be both complicated and risky, it doesn’t have to be.

In this episode, I’ll cut through the confusion that may be preventing you from investing. I’ll make it simple, so you can invest confidently and wisely.

Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!

Why Investing Seems Complicated

Investors have a lot of choices these days: thousands of actively traded stocks; over a thousand exchange-traded funds; tens of thousands of mutual funds; and endless tangible options, such as real estate and precious metals.

While it’s fantastic to have so many choices, the abundance of opportunities can be daunting. It reminds me of the famous jam study where grocery store customers were offered different flavored jams to sample, along with a coupon to buy one jar.

Regardless of whether the researchers put out a large assortment of 24 jams or just six of them, customers only tasted two different jams. Most customers were drawn to a larger assortment of jams, but fewer of them purchased a jar.

On the other hand, the segment of customers who sampled from a small assortment of jams were 10 times as likely to buy one of them. This study raises the idea that having more choices can be overwhelming and keep you from making a decision. When we feel confused about what to do, we tend to do nothing.

I'll be the first person to recommend that you never invest in anything that you don't understand. However, too few people understand the fundamental building blocks of financial investments, which are stocks and bonds. My goal is to make you comfortable with them so you don't feel paralyzed choosing mainstream, legitimate investments.

Why Investing Is Mandatory, Not Optional

First, remember why you need to invest in the first place. Tucking your retirement funds into a savings account may seem like a safe option. However, the reality is that not investing and letting your cash sit idle can be much more risky over the long term.

The historical rate of inflation has been about 3%. Therefore, if you earn less than 3%, you will lose money over the long term. To get over that hurdle, and hopefully earn double or triple that rate of return, you’ve got to invest.

Free Resource: Retirement Account Comparison Chart—handy one-page PDF download showing retirement account rules and best places to get them!

There are really only two fundamental ways to make money: be an owner or a loaner.

How to Make Investing Easier and Less Complicated

To make investing really simple, I’m going to strip it down to its core. There are really only 2 fundamental ways to make money: be an owner or a loaner.

When you own assets that appreciate in value you can sell them for a profit or take out profits in the form of dividends.
When you loan money you earn interest until the original debt is repaid in full.

No matter how complex a financial instrument is you can boil it down to one of these 2 basic concepts.

What Are Stock Investments?

Let’s dig into the idea of investing by owning assets that appreciate in value or spin off dividends. Here are a few examples:

starting a business
becoming an equity partner in someone else’s business
buying real estate
building an art collection
collecting precious coins

These investment options require you to have expertise in running a business or making money in a certain real estate market. Unfortunately, not everyone has this kind of specialized knowledge.

Wouldn’t it be great if you could profit off of someone else’s great ideas and execution without having to do all the work or come up with a ton of money? That’s why the stock market was created!

One of the easiest ways on the planet to become a part owner of a business is to buy shares of a publicly traded company, like Apple (AAPL), Nike (NKE), or Google (GOOG). Not only do the various exchanges, such as the NASDAQ and New York Stock Exchange, allow you to buy shares, but you can sell them at any time.

Stocks, which are also known as equities, provide the greatest opportunity to make money, but they can also be extremely volatile. A company’s stock price can fluctuate wildly over the short- or long-term, which means you can lose some or all of your investment.

So I generally recommend that you do not buy individual stocks. Instead, spread out your risk by owning many of them. Since that’s difficult and impractical for average investors, the solution is to buy funds, which are made up of hundreds or thousands of stocks.

Choosing a stock mutual fund, stock index fund, or a stock exchange-traded fund (ETFs) gives you convenient, baked-in diversification.

What Are Bond Investments?

The other primary way to make money that I mentioned is to be a loaner. Even if you aren’t flush with cash to lend out, you can buy investments that do it for you, called bonds.

When you purchase a bond, you lend money to a government entity or a company. They might need money to build a bridge or a new factory. In return, they agree to repay the loan over a set period of time at a fixed interest rate.

Since bonds provide a fixed income, they’re much safer than stocks. However, safety always comes at a cost because they offer lower rates of return.

Just like with stocks, you can diversify by purchasing many bonds at once through a bond mutual fund or a bond exchange-traded fund. That makes it simple to invest small amounts without having to be an expert.

How to Buy Investments

Since stocks and bonds are the building blocks of investing, most of us need both of them in our portfolios, plus some amount of cash for emergencies. But how much of each type of asset should you own?

The answer depends on your appetite for risk, plus other factors like your age and when you want to retire. While there’s no one-size-fits-all asset allocation, in general, the younger you are, the more stock you should own.

A general rule of thumb to calculate a reasonable amount of stock to own is to subtract your age from 100 or 110.

If you’re in your 20s or 30s with many years to go before retirement, your asset allocation should be relatively aggressive because you have a long time horizon. That means you might want to own 80% stocks with the remaining 20% in bonds and cash.

When you’re in your 50s or 60s, you have a shorter time horizon and need to preserve the wealth you’ve accumulated. You might own 40% in stocks with the remaining 60% in bonds and cash.

A general rule of thumb to calculate a reasonable amount of stock to own is to subtract your age from 100 or 110. For example, if you’re 30, consider allocating 70% to 80% of your entire investment portfolio to stocks. Likewise, if you’re 60, you might need a maximum of 40% to 50% in stocks.

Which Investments You Should Choose

Now that you understand the basics of stocks and bonds and how much of each type you should own, you’re probably wondering how to buy them.

If you have a retirement plan at work, like a 401k or 403b, your choices are easy because there’s a pre-selected menu of funds. The names of the funds will vary depending on which brokerage firm your plan is with, such as Fidelity, Vanguard, or Merrill Lynch.

But funds are usually grouped together as stock or growth funds and bond or income funds. You may also see a category called balanced funds, which hold a combination of stocks and bonds.

Let’s say you want to invest 80% in stocks. You could choose one or several stock funds that add up to 80% of your contribution. The remaining 20% could go into one or more bond funds.

If you don’t have a workplace plan, open up an Individual Retirement Arrangement or IRA. They also provide a menu of investment options or suggest a portfolio based on your age or stated risk tolerance.

For a summary of the traditional and Roth retirement account rules, plus the best places to open one up, download the free Retirement Account Comparison Chart.

Workplace plans and IRAs also come with an advisor or plan custodian who can help you choose individual funds if you aren’t sure what’s best for you. In general, getting your asset allocation right is far more important than the specific stock or bond funds you choose. But remember that if you make a mistake, you can change your asset allocation at any time.

Another key component to investing success is to choose low-cost funds. Fund fees reduce the growth in your account year after year. So look for mutual funds with fees less than 1%, or ideally less than 0.5%. If exchange-traded funds are on your menu, they offer many advantages including fees that may be far less than mutual funds.

How to Simplify Investing

To sum up, investing can be as complicated or as simple as you want it to be. If you want to do hours of research and spend time as a DIY investor, you can. But you can also open up a retirement account and simply choose funds based on how much stock you want to own.

There are even one-and-done funds called target date or lifecycle funds that are growing in popularity. They hold a pre-set amount of stocks and bonds based on the year you want to retire.

A target date fund owns many underlying investments and automatically updates your allocation on a regular basis so the fund is aggressive when you're young, but become more conservative as you get older. In other words, it owns fewer risky stocks and more conservative bonds as you approach your desired retirement age. It really doesn’t get any easier than that!

One of the most powerful ways to build wealth and financial security is actually pretty boring. Simply choose low-cost funds inside a retirement account and contribute 10% to 15% of your income over a long period of time.

Don’t get fooled into thinking that you have to take a lot of risk in order to be an investor. Of course, investing always carries some amount of risk. But you’re in control and can choose high risk, moderate risk, or low risk investments. It’s totally up to you.

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all about How To

Rabu, 31 Agustus 2016

Are You Making Investing Too Complicated?