Investment Strategies
 

A Certified Financial Planner (CFP) can prove very valuable for the inexperienced investor. They can provide you with important guidance in many aspects of Investment Strategies. Note, however, that help with investing strategies comes after the creation of your Financial Plan.

Simply put, virtually all CFPs will recommend that an individual start their investing career via their companies 401k plan.
*****INCOMPLETE MUST FIT THIS IN BETTER **************

Not only is it important that you start investing as soon as possible, but you must also quickly identify "what are you saving for". People save for a variety of reasons to include:

o    Buying household items, a boat, or a car.

o    Buying a house.

o    For childrens college education

o    For retirement.

By understanding what you are saving for, you can establish measurable goals for and periodically track your objectives.

Other things to think about are your investment timeframe, and the amount of risk you are willing to accept as part of saving and investing.

Timeframe

In the examples enumerated above, each has its own unique timeline. You either need a car today, or maybe next year. You would like to have a house today, or maybe in 3 years you could have enough money for the downpayment. Your kids are 0-18 years away from college. You may be 0-50 years away from retirement.

It is very important that you understand the timeline of something that you may decide to save and invest for. For short term saving, particular categories of investments  may prove most advantageous, while for longer term goals, other types of investments may generally be best. These categories of investments are generally specified by their degree of RISK.

Risk

The year is 1928, and you have decided that a very safe place to put your money is in your local bank. You rest easy with this decision.....for about a year !

In general, money market and bank accounts are considered low risk places to save. The problem with banks is that the yeilds are so low. If you open a stock account, like a Charles Schwab account, I have found that the money market accounts offer a better yeilds than do most banks. Since all money markets are not created equally, you should review all of the info provided on them, talk to your broker, and your CFP. In general, saving for the type of short timeframe items discussed here, one should seek low risk. If your timeframe is several years, a CFP can direct you to higher yeilding low risk investments like US Treasuries, etc.

Generally, the longer your time horizon, the more risk you should incur. As your time horizon gets shorter, one needs to gradually reduce their risk, so that the funds are available to meet the goal.

The majority of this section deals with long timeframe goals such as retirement planning. History has shown that proper long term investing in the markets has outperformed inflation, and thats what investors need to strive for.

Virtually all investments come with an inherent risk. Buying that new no name IPO stock that just hit the street could leave you with a 10 banger (a ten fold increase in your initial investment), or it could leave you with a really nice tax write-off, spread out over a number of years, for all of the money you lost. Inexperienced investors often times start their stock investing career like this (I did). They jump on a hot stock, sell when they have made a few bucks, and then go tell everybody how smart they are. They rarely ever talk about that stock that they LOST a few (or many) bucks on, because that destroys the illusion that they have created for themselves. Trying to time the market is a fools game....period.

Diversification and Dollar Cost Averaging

As an inexperienced investor, most CFPs will recommend a well diversified mutual fund, or perhaps a group of a few funds that you "dollar cost average" into.

Now you say, "Huh !      Whats diversification and dollar cost averaging ?".

Your CFP can select a fund or group of funds for you that represent appropriate diversification. It also depends on how much you have to invest. The more you have, generally, the more diversified you can become in your investments.

Regarding diversification, some mutual funds invest in "similar things", like a specific business sector. This is not what I would deem to be a diversified fund. Some funds invest in stocks from companies of a certain size in lots of different sectors (e.g. retail, high tech, natural resources, banking, etc), but all in the US. These are more "diversified", but one can go further. Some funds are well diversified GLOBALLY. That means they invest in lots of sectors all over the world. Good funds like these can offer even greater diversification. If you are really lost, and you should be because you are an inexperienced investor, obtain guidance from your CFP.

I PERSONALLY am pro the US, Hong Kong, China, and many European companies right now (4/1998). So the few mutual funds I have are mainly in these regions (I mostly buy individual stocks). TO ME, well selected companies across a number of sectors in these regions represents good diversification.

Now what is this "dollar cost averaging" ? This is the part that YOU have to worry about. It means that you set aside a specific amount every month to be deposited into your selected diversified fund or funds. The well accepted theory here is that since funds are generally down more than they are up, on average, over time, a LONG TIME, you will buy them when they are cheaper.

A long time ago, my wife and I were able to save half of our total takehome each month and we dollar cost averaged into 3 Fidelity Funds. We did this a long time. Now I have the joy of looking everyday at the gains in the 3 funds, as well as the task of understanding why they made different amounts of money. I think this is a good real world way of learning mutual fund basics.

Now I have not told you everything you need to know about "getting started", or all there is to know about mutual funds, but my objective was to get you thinking. Mutual Funds get you started. If you have NO desire to really learn about investing, then thats where you will probably stay. What my FinanciaLogic web pages want to do is to start making you think about other more sophisticated investing, such as individual stocks. My mutual funds have not ever made as much as many of my individual stocks have. In general, my mutual funds are generally International Funds, since I believe I am well diversified in the US markets. BUT DON'T TRY THIS AT HOME UNTIL YOU HAVE GAINED THE PROPER EXPERIENCE, AND THIS EXPERIENCE TAKES MANY YEARS TO DEVELOP.