The Beginner's Guide to Investing: Building Your Financial Future

The Beginner's Guide to Investing: Building Your Financial Future

1. Introduction to Investing

What is investing?

When people refer to investing, they usually mean the buying of assets like shares, bonds, or property that offer the potential for profitable returns, such as interest, income, or appreciation in value. These investments are designed to grow your money over time. Owning a share in a company means you own a small part of the company. When the company does well and profit increases, the value of each share held by the investors goes up too. These shares can be bought and sold in the stock market. Bonds, on the other hand, are loans that investors can hand to the government, organizations, or companies that need funds to grow and develop their projects. The purchases leave the funds for a fixed period. When the period ends, investors will get back the funds provided plus a profit, in the form of interest, either as a lump sum at the end of the period or sometimes in the middle at regular intervals. On the other hand, investment funds pool cash from a large group of investors to put in a diversified portfolio of shares, bonds, or related investment entities – either managed by investment professionals or designed for specific purposes or objectives issued by investment companies. The future return of each type of investment, their volatility, and the amount of risk involved, including the possibility of losing some or all of the funds invested, depends on several factors. The first step for you to start investing is to understand these factors and how they could interact in your case.

1.1. Why Invest?

The Beginner's Guide to Investing: Building Your Financial Future

1.1. Why Invest?

There are only two good reasons for trying to make money if you're already rich: you need even more money, right now. That's when your motivation becomes suspect and when you might be in that uncomfortable position where you are able to lose what you already have.

In reality, there are two important reasons why people invest:

To increase wealth by increasing the value of your assets, and to make provision for the future.

Increasing Wealth. A business that generates a 10% return on its shareholders' funds can generally increase their wealth at a reasonable rate. Not spectacular, but reasonable. If the business can invest retained earnings to generate a better return than that, then wealth will grow even more quickly. Shares in such a business should therefore be a good long-term investment and should increase in value at a consistent and predictable rate, in all but the most unusual and special circumstances. This is one reason why, over the last 25 years, shares have generally given a better return than fixed deposit accounts or government bonds. Shares are an attractive vehicle for investment because the underlying businesses generate wealth.

1.2. Types of Investments

There are many ways to invest your money. You can invest it in tangible goods (in things you use or believe will increase in value), or intangible goods (in things you expect to be profitable over time). A few common tangible or real assets — which you probably have some familiarity with already — are single-family houses, commercial properties, antiques, or art. Examples of intangible or financial assets are savings accounts, Treasury bills, savings deposits, stocks, bonds, mutual funds, money market accounts, finance company accounts, corporate debentures, and insurance company separate accounts. Each offers different risks and returns.

Let's start by talking about a federally insured savings account. This is a low-risk financial investment. These types of accounts are insured. When you have less than $100,000 at an insured institution, the full amount of your accountable balances is insured with the exception of some accounts. It is a good, safe, secure way to save for college, retirement, or even a vacation. The interest rate is relatively low, but the amount of it continues to grow over time. It is one of the risk-free investments we will talk about in this guide, but it has a low return. This type of investment generally attracts people looking for low-risk, short-term investments.

2. Setting Financial Goals

When do you plan to use your savings? Setting financial goals can help you figure out how to invest your money and how much of your income to save or invest. By setting financial goals, you can achieve what’s important to you. One person may decide to use their money for retirement needs, while a different person may decide to use their money for a house purchase or a child’s education. Start Early If you have a job, think about your financial goals now. The earlier you start working toward your financial goals, the more options you will have. If you are 21, you have 70 years to make a plan for achieving your financial goals. The place to start is to figure out what you might like to accomplish with your money and when. Then figure out how you plan to use your money to reach your financial goals. It is normal for your goals to change over time. But as you get older and closer to reaching your goals, your money decisions will need to reflect where you are in life. Your parents or another adult you trust can help you decide what is realistic for you to be able to achieve with your money.

2.1. Short-Term vs. Long-Term Goals

As with any aspect of personal finance, your long-term goals will carry the most weight in investing. Saving for the short term is also an important aspect of a successful financial plan, but traditional saving products don't offer the potential for a high return that is associated with investing. For short-term goals, it's usually better not to take on too much risk, as a significant loss in a short period of time could be devastating. Since many people get the two confused, here is a simple way to understand the implications of each.

If you need money in fewer than five years, you're saving, which is short term. If you need money in over five years, you're investing. While they sound the same, they're completely different when it comes to the implications that each has for your financial life. Your investment goals will help you establish a time frame for your goals. If you don't have a lot of time to invest, you're probably not going to take big risks and bet it all on one hot stock or research company. These types of investments are called speculative and should make up a small percentage of your investment portfolio.

3. Understanding Risk and Return

We hear a lot of advertisement about "high-yield" investments, but most of the time these are investments in anything but yield. They are high-risk investments. There's an old adage that says "the higher the risk, the higher the return." There's a corollary to this adage: "the lower the risk, the lower the return." What you end up with is a trade-off between a rate of return and the risk that the return will not be achieved. And even if that return is achieved, the lag time until you receive the money may be greater than you like. With savings bonds and certificates of deposit, you can rely on the money being there at your specified period because these investments have a predictable time element. If you lock your money in for a certificate of deposit for five years, you know you'll receive the stated rate of interest plus principal in five years. If many risky investments existed that guaranteed high-interest rates plus principal, nobody would invest in low-yielding investments. The world knows that high-yield bonds are also high-risk bonds. The corporations that issue them are often considered candidates for reorganization, bankruptcy, or failure in terms of paying their debts. Thus, a trade-off exists between incurring risk to get a higher rate of return and accepting less risk for a lower rate of return.

3.1. Risk Tolerance

Imagine you've just begun to think about the future and decide that investing your savings is a good idea. Investment professionals will tell you that you have to identify your risk tolerance in order to know where to invest your money. Otherwise, they say, you could lose everything. That's true to a certain extent, but it's generally not that bad. What these investment professionals generally won't tell you is that they begin with one basic premise, and that their questions rely upon this fundamental belief. If you save pennies now and invest wisely in the present, you will eventually become prosperous. That, in their opinion, is how the world works and that is how you should plan for the future.

But reducing your risk most often results in reducing your potential gain on the upside. To use the sports analogy again, the player who invests outside his or her comfort zone is the one who can return a punt for a touchdown. However, we realize that even a player making millions of dollars a year and who leads a charmed life won't be perfect all the time. That's similar to the financial markets. The point of diversification is to reduce fear by giving you a better chance of a good future, but not to guarantee against investment choices that will leave you worried, wondering where you went wrong.

4. Building an Investment Portfolio

The goal of portfolio diversification is to spread risk and minimize potential losses. It's designed to smooth out the investment returns while attaining a good overall average return. Since different investments often go up and down at different times, holding more than one investment can help make up for poor-performing ones. A diversified investment portfolio is spread out over a variety of different holdings. Some are designed to provide income or growth; others may have high risk and high potential for appreciation.

Spreading investments among various vehicles within each asset class reduces the stock market risk. The object is to spread investments among a variety of asset classes and among the investments representing those classes. When creating your portfolio, make asset allocation decisions consistent with what you’re working towards and with what you’re willing to tolerate in terms of risk and potential profits. Funds in a portfolio should ideally be spread across different asset classes, risks, styles, sectors, and other factors in order to achieve the benefit of diversification. The best type of diversification acts to reduce portfolio volatility without impacting overall return. The amount of diversification required varies by investor, but typically higher income taxes, risks, and overall uncertainty warrant a greater need for diversification. As a result, a globally diversified portfolio is comprised of investments in several markets around the world, making it more stable and capable of delivering higher returns.

4.1. Diversification

Diversification refers to spreading your investment dollars around across different securities and investment categories such as stocks, bonds, money market instruments, or real estate. Its premise is that not all investment categories and securities move up and down at the same time and magnitude. By allocating your investment dollars across different sectors and categories, spreading them across different securities, and dollar-cost averaging your purchases, you can minimize your risk of being wiped out if one of your investments goes bad. For instance, diversification can minimize the risk of loss in the value of your stock investments by spreading them out among several different stocks. Diversification can minimize the risk of default in your bond investments by holding short-term Treasury instruments rather than long-term corporate debt. Diversification can minimize your purchasing power risk by holding foreign securities that have different monetary characteristics. Diversification is important because it is the only truly free lunch that the investment gods offer to us mere mortals. Because higher-risk investments tend to offer higher expected returns in the long run and are still subject to more severe short-term price fluctuations, the overall expected return of a diversified portfolio of investments can be increased by assuming additional risk. This finding is an extension of the observation about the relationship of risk and return. Similarly, it is also useful to remember that because different securities and investment categories may encounter distress during the same period of time, overall diversification of your portfolio cannot completely eliminate risk.

5. Investment Strategies

Your strategy for investing should align with your lifelong financial needs and wants. As we've said, generally, if your money has at least five years to grow and inflation is part of your annual return, then you should consider investing more money. But let's consider the details of how to invest. As with most of your financial decisions, investing is about the balance between risk and reward. While no single investment is likely to produce everything you want or need, spreading your money among different types of investments can affect the overall risks and rewards of your investment plan.

Bonds, also called fixed-income securities, are considered to be on the lower-risk end of the risk/reward curve. You can loan money to a business or government by investing in bonds. In return, the borrower agrees to pay you a predetermined rate of interest, as well as to pay back the initial loan when the bond matures. Because the level of interest is generally set in advance and regulated by a contract, the return on bonds is usually more predictable and usually less risky than stock ownership. If you don't stray too far and you stick with quality, bonds have been considered less risky than other investments and have traditionally provided good balance to a stock-based investment plan. However, their traditional role as the low-risk foundation of a sound investment plan may be changing. Bonds have had a good ride in recent years as interest rates have declined. But interest rates are cyclical, and many experts feel they'll reverse themselves in the not-too-distant future.

5.1. Value Investing

The concept of value investing can be done through mutual funds, ETFs, and stocks; the approach is applicable across them all. In essence, value investing is simply about buying an investment for less than what it's worth. The idea also doesn't solely apply to stocks; it can be used in other investing endeavors, such as buying distressed properties below market value. One of the key figures in the concept is a man named Benjamin Graham. He wrote a few books, taught at a university, and accumulated a fortune. One of his students is arguably the best living practitioner; at last count, he sported an investment worth around $40 billion. Not too shabby.

Stocks are sold through an exchange just like anything else you can buy for whatever the highest bidder is willing to pay. Every quarter, the company releases a report card on its health called a "balance sheet" and an "income statement." These are the company's "report card" and "business." The first two investable concepts we covered—diversification and long-term focus—are to some extent insurances against doing the wrong thing. Human nature too often is the enemy of successful investing, leading us to do something rash or cash out when difficult times come. Value investing is about actually allowing the market to "fear" an asset, company, or industry. There is a certain knowledge gap in the market—a sense that the asset should be trading for less than its intrinsic value—and we pounce on that. No market, no profit.

6. Investing in Stocks

When you own a share of stock, you are a part owner of your company. If the stock of a company has been publicly traded, chances are that you could find quotations on the stock in the pages of your daily newspaper, or you could buy the stock from various brokerage firms. The most important considerations when you are considering stocks are their performance due to incorrect buying or selling decisions and other short-term or one-time-only factors like unusual items and extraordinary events incurred by a company. If your company's stock is listed publicly, it must file various reports with the government, especially the Securities and Exchange Commission. Its reports would reflect its financial health and some people's opinions about the prospects of potential profitability. You might check some major indices for stocks of your own company.

A stockholder has a voice in the corporate policy of the company in which he or she holds stock. The company makes decisions on such items as investment in new plants or equipment, or possible mergers or acquisitions. You may vote at the company's annual meeting or by proxy. When you buy stock, always remember that you enter into a risky investment. This is true no matter how high the price of stocks might be. Even though the price drops, you might still receive some payment. You risk not getting all of your investment if the company goes under or is liquidated. Ultimately, the success of investing in stocks depends on an investor's judgment. Even though there is a lot of information readily available to help you in your decision, it is your responsibility to make a decision that is right for you, and make certain that it is made timely without delay on your part.

6.1. Blue Chip Stocks

Blue-chip stocks are shares of the largest, most liquid companies listed on the Australian share market. Rather than one particular financial measure defining whether a company is a 'blue-chip stock', it is the community's perception and commonly held beliefs about these companies that ultimately determine their classification as blue-chip shares. These companies are well-established and historically conservative entities. The term blue-chip comes from the game of high-stakes poker where the blue chip is the highest denomination chip that is used. Blue-chip shares regularly generate positive, above-average returns and pay dividends consistently of high quality. They are normally of large to very large market capitalization and trade on the Australian share market with considerable volume - that is, the market is deep for these shares. In the event of a serious market decline, a blue-chip stock will offer the investor relative security. The list of blue-chip stocks is constantly changing and being debated among the investment community. It is important that the investor forms his or her opinion about what blue-chip stock represents and what companies fall into this category. Some widely recognized criteria of blue-chip stocks include a strong balance sheet in terms of debt-to-equity ratio, not a purely cyclical company, superior earnings and dividend growth, and the ability to ride out economic difficulties and deep market downturns.

7. Investing in Bonds

In many instances, bond investors are typically seeking higher income than money market or short government and corporate bond investors. Bond investors are also typically seeking the relative safety and security of principal that is not available to stock investors. As a bond investor, the principal value, interest payments, and the degree to which you will enjoy these benefits are contractually guaranteed. Bonds are often used by seasoned investors who are looking for greater safety of principal and higher income that is not typically provided by money market funds and stocks. Bonds are generally more interest rate sensitive than money market funds. Bonds of any maturity or quality can be sold in a resale market prior to their maturity. Bonds are one of the most flexible and easy-to-use investments for investors. However, bonds are still burdened by five types of varying interest rate risks. Furthermore, taxation issues for bonds can impact an investor's degree of investment success. Although some intangible benefits may be found with bonds, such as the knowledge that your interest payment and principal payments are guaranteed, individual bonds offer fewer intangible benefits than do government and corporate bond funds.

7.1. Government Bonds

Bonds are promises you make to a borrower. The borrower (the bond issuer) promises to pay you interest for a set period and then pay back the principal at the end of the loan. When you buy a bond, you lend your money to the issuer. Bonds offer you the security of a known return, plus the security of the issuer’s financial stability. Investing in bonds is considered one of the safest. Unlike stocks, it isn’t easy for people to buy and sell government bonds. That’s because, unlike company shares, which are traded on the stock market, government bonds don’t have one single place you can visit to buy and sell them. Execution and servicing fees are associated with buying and selling securities on the secondary market by a private individual.

8. Investing in Mutual Funds

There is a wide variety of mutual funds available for today's investors. Depending on your investment objectives, you can invest in a single fund or in a combination of funds, such as retirement plans or individually managed funds. You can also invest to achieve one or more of these objectives: - Conservation of principal and ready access to your investment. - Current income. - Income with long-term capital growth. - Long-term capital growth. Most mutual funds offer you the opportunity to work toward these goals by selling you "shares" in the funds. With that purchase, you agree to pay certain fees and expenses. The value of your investment will fluctuate depending on the value of the fund's underlying investments.

Some funds attract investors whose primary goals are income tax savings, rather than high current income or long-term capital growth. These funds can be useful to investors who need to save for college expenses, retirement, or to put aside funds to purchase a house. However, if you don't manage these tax-aware funds appropriately, you may lose much of their benefit. The funds may not be right for you if you don't have current or future taxable liabilities, if the potential tax savings don't outweigh management fees, or if the money you are able to save is hampered by liquidity requirements.

8.1. Index Funds

Index investing is a way to model your investment strategy around the stock market as a whole. This is known as passive investing, since making trades without any additional thought usually involves no action at all on your part. Instead of researching billions of combinations of investments to find some tiny edge, focusing on index strategies allows you to spend your time on other goals. In fact, even many professional investors agree that your best choice is probably to select a mix of a few large, broadly diversified index funds. Your goal in adding index funds to your investing strategy is to achieve full diversification. This means that by purchasing shares in these index funds, you are investing in both large and small companies and in every stock industry in the world. This guarantees that you, as a collective investor, hold a piece of the pie of the world’s companies. Because you, as an individual, own such a tiny fraction, your success in index investing will come from the broader goals associated with the collective world economy.

9. Real Estate Investing

Real estate goes from "weaving your financial future" with your tenants' rent payments to outbalancing the economic market to hedge against inflation. Real estate can diversify your investment portfolio without large outlays and in almost no time at all. True real estate can be bought directly (although it takes more money than stock trades), through a mutual fund, real estate investment trust, or a company that offers Real Estate Limited Partnerships.

But since we're focusing on small portfolios, you can solely diversify in more than one property, we'll hold off discussion on investment companies in real estate. A "buy and hold" strategy for a diversified portfolio produced an average annual return. The return drops to a lower percentage annually, including stock traders who underperformed when timing the market. However, by including a percentage of tangible real estate in your portfolio, the average annual stock portfolio produced a gain, but the return drops with intermediate stock traders. As your charter discussed moving up the joint stock ladder, this means smart investing can make beginner investors wealthy through investments in corporations that produce the products and services that we want to buy with their profits. But true investing doesn't involve stock buying and selling. Rather, real estate investment trusts were designed to allow anyone to obtain a share of income-producing real estate through the purchase of popular investment vehicles. They generate income as companies that operate apartment blocks, hospitals, senior facilities, industrial parks, office and commercial warehouses, and malls and regional/strip shopping centers. As a kind of ultimate investment in the common shares of a corporation - specifically, a corporation pays no federal income taxes on its corporate earnings, a significant portion of which is distributed as income to shareholders. So a real estate investment trust, in exchange for these tax breaks, has specific requirements, including a higher income distribution requirement. A portion of what it earns must be paid out in the form of dividends to its shareholders. As my charter discussed, distributing almost all it earns while keeping a small percentage for operational costs. Real estate offers a means for corporations to minimize the double taxation of S corporations by allowing company profits to be taxed once as personal income to the shareholder. These S corporations and partnerships in real estate have dividend distributions that are designed to receive favorable tax treatment. Finally, like mutual funds, they are also supposed to be more liquid, trading on all major stock exchanges. Today, you can consider real estate investment trusts as one of the most effective U.S. investments. The average market value of all traded real estate investment trusts increased significantly over the years. Today, it allows anyone to merge with traditional large real estate investors like corporate pension funds and wealthy individuals. Publicly-held real estate companies that qualify for tax-exempt status do so by paying out a significant portion of their taxable income in the form of dividends to their stockholders. By setting up a real estate investment trust, the federal government doesn't receive taxes while the residual real estate investors earn income.

9.1. Rental Properties

Typically, when people refer to real estate investment opportunities, they are talking about rental properties. Rental properties can be quite lucrative by building equity while providing a monthly income. However, investment in real estate involves careful consideration of all the benefits and disadvantages before making that investment. Investment in rental property can provide a lucrative monthly income to balance our investment portfolio. However, it also provides long-term benefits by increasing our equity for later use. Rental properties work as an investment in much the same way as an individual's primary residence that is owned; however, it is designed purely as an income-producing asset. It is possible to reduce the risks of rental properties, such as vacancy risk, reduction of value, and damage to the property. However, rental properties are one of the few investments that you can access and control much of the risk simply by your own performance. Unlike other investments where a separate entity is managing the investment at arm's length.

10. Retirement Planning

For most Americans, the goal behind all forms of investing is the same: to make it possible to retire one day. Retirement is divided into two phases: the first, when a person is young enough to be physically and mentally fit and socially active, and the second, when aging finally catches up with them. The second stage can be more painful than not having enough money when a person is young. People who learn too late that their assets won't stretch through two decades of retirement may age into an impoverished, friendless, and isolated condition. On the other hand, adjusting one's lifestyle to a fixed income and learning to live simply but gracefully can be rewarding on many levels, particularly when a person is healthy and active enough to enjoy their leisure. As you approach retirement, three guidelines become increasingly important. Protecting your principal takes precedence over trying to earn as much money as possible. Any sudden market drop, combined with required distributions, can rapidly destroy your investment capital. A severe bear market in the early years of retirement can permanently damage both a portfolio and lifestyle quality.

The second goal during the final five years of work is to maximize savings. If you are a professional nearing retirement with small after-tax savings and a high income, contributions to a retirement plan or a tax-deferred investment can double in a year the amount that the government lets you keep to support your quest for affluence instead of government dependence. In order to do this, most people find it necessary to invest in individual retirement accounts, corporate retirement programs, tax-sheltered deferred compensation plans, annuities, and tax-free municipal bonds. However, for those who have already provided themselves with substantial after-tax savings, these plans can actually reduce the after-tax return on their savings if too much income is generated and they have no heirs. In these cases, the ideal vehicle is also the most traditional: taxable growth stocks that have historically achieved the highest inflation-adjusted returns while allowing part of their earnings to build up without immediate tax liability.

10.1. 401(k) Plans

To give this concept a little context, here is a typical path taken by someone entering the workforce. After choosing to join a company, this person may find each department head is preaching the importance of enrolling in the upcoming retirement savings plan because the company offers a sizable contribution match. Eager to earn the extra free money being offered, the individual signs up at the lowest contribution rate required to qualify for the maximum employer match, which is then placed into a target date fund, despite the fact that they don't have a clue what they are throwing their money into. Thereafter, they continue to receive an annual raise and bonus each year, greatly enhancing their financial comfort and freedom. But when they leave their first employer, confusion often reigns. Should they leave the money where it rolled to, move it to a rollover IRA, or roll it into their new employer's plan? Do they stay even if everything feels wrong because of the possibility of returning one day? And if they want to change the way their old 401(k)s are allocated, can they do it without a penalty and before incurring a time-consuming amount of paperwork?

What It Is: A 401(k) plan is an employer-sponsored savings plan that allows employees to invest a portion of their paycheck on a tax-deferred basis. Contributions are made from pre-tax income. Participants fund these plans, making the contributions easy because they are automatic. Questions That Get Asked: 1) Can I choose if I want to withhold tax from this and how much? 2) Can I borrow from my account? 3) Do I have to use a custodian or other investment advisor? 4) How do I know what companies and industries my money is being used to support? How the Plan Works: 401(k)s are essentially the United States government's method for subsidizing corporate retirement savings. These plans grant workers tax breaks to compensate them for not funding their retirement programs with government funds, which would draw away from other important programs and services. The tax breaks earned with 401(k) plans are: a reduction or elimination of taxes on contributions made into the account; bonuses in the form of employer-provided matching money in most instances; and an upfront deferral of taxes on any gains earned on account assets.

The balance of the worker's account is allowed to be delegated before any income taxes are charged; therefore, it represents an ongoing obligation to the U.S. Treasury. As a result, the Treasury reserves the right to dictate the terms and conditions under which contributions must be made, the penalty for making contributions in a given fiscal year, and/or changes to investment uses. Unique Aspects: 401(k) plans are an easy form of savings because employees automatically garner a share of their earnings directly into the account. Although it's designed to be a self-directed account, money that is deducted from an employee's paycheck is allocated and then managed by the company's plan administrator. The one con is that the first step they should take is to set aside a small portion of their earnings locked in an individual savings account. It's possible for moderate-income earners to use an Individual Retirement Account to access this unique treatment of their earnings.

11. Tax-Efficient Investing

Many of us overlook a simple, powerful step we can take to improve our investment results – hold tax-efficient investments. When it comes to paying taxes, not all investments are created equal. Federal tax law recognizes that certain investments carry some unique tax benefits, and it rewards investors for holding these investments by reducing the tax rate on income from the investments. If you can get away with paying lower taxes, wouldn't you? The government feels the same way, and that's why it created the system of tax-advantaged investing. It wants you to benefit from these investments, and so should you. Also, because tax-efficient investments are recognized by the government, they tend to be very low maintenance – and require less attention than other types of investments. Use your tax-advantaged accounts to their fullest extent by using tax-efficient investments. Not too many words stop investors cold in their tracks like the word “taxes.” Nobody likes handing over their hard-earned dollars to the government, and when discussing how taxes impact investing, there are enough layers of confusion and misinformation to make a rotten onion blush. Taxes can have a tremendous impact on investing; it can be a huge drag on investment returns. The best investors don’t focus on the tax implications of their investment decisions, and neither should you. It sounds so simple – ignore taxes and focus on fundamentals – but oftentimes the simplest advice is also the best.

11.1. Capital Gains Tax

When an investment is sold for an amount higher than we paid for it, we realize a capital gain. Because we do not pay taxes on the value of our portfolio's assets each year, when our investments produce a capital gain, we owe a capital gains tax. I am perfectly comfortable with folks cashing in on a profit they've made, since taking a gain isn't a problem, and somebody has to pay for the services our government provides for our society, right? So, keep Uncle Sam rolling in the green!

When we've owned an investment asset for less than 366 days (or simply, one year and a day), then the gain that we realize when we sell it is commonly called a short-term capital gain. These gains are subject to a different tax treatment than the long-term gains (on assets held for at least 366 days); however, this tax calculation is just a simple percentage of the value of the gain. Note that in no situation is this percentage greater than the percentage that Americans are paying for income earned from other sources, such as one's labor! Thus, our tax code still motivates the creation of long-term investment holdings in a portfolio.

12. Monitoring and Rebalancing Your Portfolio

As your investment portfolio grows, you may begin to find that it's necessary to periodically realign the assets you have acquired in relation to the goals you are pursuing. This is called rebalancing your portfolio. By design, your securities portfolio is an ongoing opportunity. You will receive income or dividends, and if you own stocks, there may well be possibilities to reinvest that income. You will periodically need to adjust your investment choices to be consistent with your growth goals, or if something in your life changes - for example, if you have a new child and want to begin a college fund. Use these opportunities to get your allocation back in line with your goals or your needs. You may also find, over time, that the value of your holdings in a particular type of investment has grown, and now represents a significant percentage of your overall portfolio. For example, if you originally made an allocation of 10 percent of your investment funds to small stocks, but the small stock portion of your portfolio has now advanced to 15 percent of the total, you need to make adjustments.

As with any of the decisions you make pertaining to investments, you generally need to take income taxes into account when you assess when and how to reallocate your portfolio to reflect changes in your financial goals or to reflect changes in the market value of your securities. If the value of a given security in your portfolio falls to the point where it is an unworthy investment, or where its growth characteristics no longer make it a good selection for the type of investment you allocated for, it may signify the time to uncouple yourself from that security. If you decide to shed a security, sell the worst holding first, and try to eliminate positions gradually. Sell over time to prevent taking powerful one-time losses that could push you into short-term capital loss territory. But watch out for the tax impact of doing this over time. If the loss is smaller, then move deliberately. Highly appreciated positions must be sold more slowly, to anticipate beneficial long-term capital gains tax considerations. If you have paper losses in a particular security, your attempted transaction costs will be of little concern. But if you have substantial long-term profits to realize, you should evaluate the commissions closely to determine whether the sale of the security is worthwhile. While some brokers offer all-inclusive fee plans for unlimited trading, you pay commissions on a per-trade basis, and these fees could erode your profits.

12.1. Rebalancing Strategies

There are four primary strategy options for handling when and how to rebalance your investment portfolio:

1. Period-based: This is the most straightforward approach. You determine at what time intervals you want to check your portfolio, and then sell off any investments that have become overweight beyond a certain level (by 5 to 10 percent), using the proceeds to buy more of the underweighted assets to bring them into balance. The three primary time periods used are monthly, quarterly, or annually. While this form of period-based rebalancing is probably the most common form practiced by individual retail investors and small business retirement plans, the approach does have drawbacks. At worst, it can result in poor performance because it systematically violates the rule base for buying low and selling high. And from a more practical standpoint, if you’re contributing to your portfolio on a regular basis – say, through a plan – you may end up with two reasons to rebalance: you may be required to do so according to the plan’s compliance guidelines, and you may want to do so in order to leverage your normal means of implementing the 'buy low, sell high' rule.

13. Investing Apps and Platforms

Investing platforms make it easy and affordable to start building a stock portfolio. By signing up for an account with one of these services, all of which have apps that work with both Android and iOS devices, you can begin a regular saving plan with contributions of as little as $5. You can also set automatic investment rules that will purchase specific stocks or Treasury bonds during the course of the year. Once you're invested in the market, it's generally best to leave your savings alone, adjusting your investment mix only to rebalance your asset allocation. Investing tools allow you to purchase stocks or cryptocurrencies without fees. Some apps are designed to help you accumulate wealth, even if you don't have any money to invest. They invest small change in the market in an ETF portfolio, making it theoretically painless to start. Other apps invest your money in pretty much every type of financial investment made available to individuals and claim that they are built to achieve maximum profits for a given level of risk. Some platforms take a no-bonds, no-trading approach to your net worth, allowing you to invest, borrow, and spend anything on a single card with no fees, minimums, or commissions.

13.1. Robo-Advisors

In the fast-paced 21st century, competition requires adaptation and evolution. Robo-advisors are designed to simplify the world of investment management by adding automation and computer algorithms to the advisory role. Generally speaking, any part of the investment process that ends with an investor's money being allocated to various securities based on pre-determined criteria can be done by a robo-advisor. Retirement plans are the most common place from big-name financial institutions, which offer investors personalized financial advice and the services that come with a human financial advisor.

What are the basic types of robo-advisors? There are two basic types of robo-advisors: equity only and fixed income. Currently, the majority of robo-advisor offerings are equity-only models. This is most likely because early robo-advisor adopters tend to be millennials, who have many earning years ahead of them and are more willing to accept the risk of an equity-only investment. However, there is a big disadvantage to the all-equity model: larger drawdown periods. Although no one enjoys large fluctuations in their investment portfolios, retirees who face large drawdowns that occur after their fixed income resources are depleted are in a particularly bad position.

14. Ethical and Socially Responsible Investing

Ethical investing. Socially responsible investing. They're catchy labels, but what do they mean? What's wrong with just going after the return a company can provide regardless of how it operates? We face the potential for internal conflict when we commit capital with the hope of generating a sum greater than our initial investment, our profit. At the same time, we must take advantage of the opportunity to also create something more lasting. The focus of ethical and socially responsible investing, then, is to monitor the worth of our investments on both returns.

There are many reasons to support these types of investments. Naturally, these cover the expected personal issues of peace and justice. These investments can help. It is important to recognize that it is both fair and reasonable to ask one's investment to reflect their values. However, it is vital to carefully review the result to confirm that values actually come through. "Ethical" and "socially responsible" investing refer to different concepts. "Ethical" means doing what is right according to principles of conduct. "Socially responsible" means a longer-term corporate look, including economic, environmental, and social dimensions. It is important to separate the actions of the particular company and their outcome from the impact of that action on the business.

14.1. Impact Investing

Impact investing weighs positive results for society and the environment as well as financial returns. In other words, impact investing supports a company's goals through dedicated activity or investment in such companies. To follow this process, consider your beliefs and values and streamline your investments to show them paying off in your growing capital. Make it part of your investing choices from time to time. This way, you can build a positive legacy, bet on a better future, participate more actively in the market, and potentially influence a company's market value, brand, and reputation. Those who value social or environmental concerns as part of their decision-making may have limited areas for investing in index funds or mutual fund products. If you purchase individual stocks, be sure to plan effectively. Moreover, consider applying strategic voting rights and best practices in management as well as best practices in businesses such as constructive engagement discussions and communication discipline activities to promote positive change.

15. Common Investing Mistakes to Avoid

Investing is a difficult process because it is so easy to make mistakes. Unfortunately, no one is immune to this. People with lots of money still make foolish mistakes. But these mistakes can nearly always be avoided or minimized, and they can be minimized just by the act of being aware of them. So don't be too concerned. With some education and a bit of caution, you won't experience most of the problems that people face. The following are some of the common mistakes that you'll want to avoid while investing your money.

Not understanding the difference between investing and speculating and making sure that you are doing the former. Not understanding who you are when you are risking money in the markets because the type of person you are will determine which investments are acceptable for you. Not understanding what an investment is, and thus not being aware of when you are investing in a fad. This is paying attention to the hype or word-of-mouth rather than the underlying company or what it is that makes it what it is. Contribution levels or otherwise ignoring the number of shares outstanding, and thus the value of the company given the current stock price. The commission. Setting stop-loss orders at the same price, because the price could fall just before the limit order is carried out. Not achieving, or not continuing to achieve, the title of being a specialist in the area in which one invests.

15.1. Market Timing

With market timing, the investor tries to determine when his investments will do the best; he switches his money from one type of security to another in an effort to outsmart the market or improve performance to offset market downturns. Although the idea is sound, research has shown that few investors can successfully time the market over and over. The investor must spend the time necessary to understand what factors may cause market changes and at what point these changes develop. However, it is important for every investor to note volatile market periods and the general direction of the securities in which he is invested or wants to invest. If a deep, prolonged downturn is developing, he may be able to reduce losses by switching from stocks to bonds or money market funds.

There are several methods to calculate the level of the market: But it is difficult to track market performance every day. Some investors simply rely on the major future markets to signal general market direction. Such indexes are reported daily by major financial cable networks. In selecting a market-peak method, a medium-term investor can hardly avoid examining the basic historical tendencies of the approach if he is to avoid prematurely cashing in a substantial portion of a rising market.

16. Conclusion and Next Steps

Congratulations! You've finished the Beginner's Guide to Investing. Now that you're at the end, let's review where you've been and what you should do next. To recap, we started by exploring five sets of money days on the streets of Manhattan. That exposed some of the key issues that investing can resolve for you and showed that you're not alone in thinking about these things. Then, looking at the investment world from a homemade point of view, we discovered the importance of focusing on owning things and being patient. A little examination of the financial universe showed you the variety of things you could buy and own as a smart investor. From that perspective, you could see that the financial intermediaries—all want to help you. Their business depends on it. Plus, these good folks have huge financial incentives to help. The capital you will give to them provides the lifeblood of their financial existence. How was your financial expedition through the investment world? Did it raise any questions that are unresolved? It actually should! The journey you have just taken introduces you to investing. But that's only the beginning. Did you think a single, simple book could provide all the answers for the rest of your days? I didn't offer to wave a wand and permanently change your financial life. We just took the first step in a long-term plan and journey through a lifetime of investment decisions.

The Beginner's Guide to Investing: Building Your Financial Future