Investing: A Primer for BEGINNERS. Part 2
Various Investing Stragegies
An investing stragegy is nothing more than the method you use
to put money into an investment, and to manage that investment
once you have money in it.
Putting Money Into Investments
The first thing you have to decide is WHETHER to put money into
My response to that is a resounding YES! ABSOLUTELY! No
question. Do it!
If you are not putting 10% of your earnings into some sort of
savings or investment account, then you're missing one of the best
chances you will ever have to increase your own personal wealth.
My own personal opinion is that everyone needs to learn to live
on half of their income, or even less. I can hear you gasping in
horror even now. WHAAAAT? How can you say such a thing?
Consider this: Federal and state taxes take about 30%. That's
"only" 30%, if you're lucky. You should tithe another
10% (we will definitely explore tithing in another series of
articles on this site), or at least designate 10% of your income
for charity - or BOTH! - and you should save (including
investments) 10%. Adding the minimums there, 30% for taxes, 10%
for charity, and 10% for savings, that only leaves you half your
income to live on.
"But David!" you wail. "I can barely make
it on what I get now! How on earth can I afford to save 10% out of
That's a personal financial management issue, and we will get
into that in yet another series of articles here. But bottom line,
you can. Trust me on this one. If you simply take the 10% off the
top, have it taken out of your check before you ever see it, you
might not even miss it. Then again, you might, but I promise you
this - ten or twenty years from now, you'll be very glad
So that answers the question of should you invest.
No question: YES!
The next thing you need to decide, is HOW to save this money.
For people getting started with putting money aside, there are
many possible ways, but only three main ways most people get
Their first impulse is to put it into a bank savings account.
This is certainly better than not saving any money at all, and if
you're only able to save $10 a week, this might be the way you
have to get started. But you can do better.
The other two main methods involve opening an investment
account. Many investment accounts require a certain minimum
startup amount, and this can be as high as $5,000. Most investment
accounts, however, require much less, some as low as $250 or even
There are some investment accounts that you can start with only
$50 or less, if you agree to have regular deposits
into the account deducted from your paycheck. I definitely
advocate having regular investment deposits deducted from your
paycheck if you can.
The two main kinds of investment accounts are Managed
Accounts and Self-Directed Accounts.
Managed Investment Accounts
With a Managed Investment Account, you essentially turn over
all your money to an investment manager and forget about it.
The good part of this is that you don't have to do anything
else. You don't have to worry about keeping up with it. You just
watch your account a couple times a year and see what happens.
The bad parts of this are (a) you will pay your account manager
a commission, usually for each trade he makes in your account; and
(b) if you get a bad account manager, you may not realize it until
your money has dwindled badly.
Just like with any other aspect of investing, picking a managed
account manager is a risk. You might get a good one, you might get
a bad one. Just like with any other aspect of investing, it will
pay you to do your research on this before commiting.
With a Self-Directed Account, you are in charge. This means you
have to watch your investments, and you need to actively change
them when you see it's time to do so.
The bad part of this is that it requires a lot more work on
your part -- usually a half hour or more a week instead of an hour
every six months or so for a managed account. If you fall down on
this part of the job, you stand a chance of losing some of your
equity or missing out on some great opportunities.
The good part of this is that if you're willing to learn some
rather simple concepts and diligently devote that half hour per
week to your investments, there's no question you will make far
more return than 90% of the managed accounts out
This series will focus mostly on self-directed accounts, mainly
because with managed accounts, you just pay 'em and forget 'em.
This series will help you understand how to manage your accounts,
and how the forces behind investments work.
How You Manage Your Investments
When you're getting ready to "manage" your
investments -- to take care of the money you're saving -- the
first thing you must decide is your INVESTMENT GOAL.
You have to decide where you want to be on the risk-return
spectrum. Do you want SAFE investments, and want to avoid as much
risk as possible, even if it means you only get 5% or less on your
money? Or are you the kind of person who wants to do whatever you
need to so as to mazimize your return? Are you willing to take a
few risks so you can make 20% or even 40% or more on your money
Do you want to put your investment money totally aside for the
future, so you won't be taking anything out of it for a while? Or
do you want to try to establish an income?
All of these things are possible (just not at the same time!
Grin!). You just have to know what you want, then do a little
study to determine which investment vehicles will best get you to
In future articles in the series, we'll get into the details of
buy-and-hold, dollar cost averaging, market analysis, timing
strategies, and several other things. We will start out right here
by giving you some quick definitions, so you'll have an idea of
what these terms mean.
Buy And Hold
This is the strategy in which people buy an investment, perhaps
some stock or shares in a mutual fund, hoping this
investment will rise in price and value. Once bought, these types
of investors hold on to the investment until they need the money
from it, then they sell.
The biggest minus to this strategy is that if the market goes
down, then the value of your invesment rides the downslope right
along with the market.
Dollar Cost Averaging
This concept is similar to buy-and-hold, but it adds the
premise that you invest an equal amount of money to your account
(and purchase an equal dollar amount of new investments) each
month. Usually, this will run between $100 and $1,000 a month,
depending on you. The premise is that when the market is down, you
will buy more shares of the investment, and when it rises, you
will buy future shares of the investment. In the long run, it
averages out that you will have more shares at a lower price than
if you'd bought a specific number of shares each month.
We'll just touch on the definitions here, and go into more
detail in a future article. Essentially, this means watching the
market, what it does, and what the forces are that impact the
market, and adjusting your investments accordingly.
There are two main types of market analysis.
Fundamental Analysis watches the forces that
might impact whatever industry your target investment is in. For
example, if you are investing in technology, then the invention of
a super-cheap display technology might have a big impact on your
investment. If you are investing in Kellogg's or General Mills,
then a huge surplus of wheat and sugar might impact that industry.
Technical Analysis is watching what the price of
any given investment is doing, the ups and downs of the price. For
example, if a particular stock has recently reached the lowest
price in its history, does that mean a buying opportunity, or does
it mean that company is going out of business? If the Acme Rotary
Telephone Dial Factory stock price hit an all-time low, you might
suspect that industry is in trouble. But if a company like
Wal-Mart or Dell hit a 5-year low on their stock price, you might
conclude that it's time to start buying their stock.
There are people out there who will tell you that prices always
rise or fall on a certain day of the week, or of the month, or
related to the compay's earnings reports. There are even people
out there who make a living relating the stock market to the lunar
Leave these alone. If you need to read a primer like this, you
don't need to be loaded down with confusing strategies that
sometimes I wonder whether they make sense even to the people who
That's enough for now. In the next part, we'll get into some of
the basics about the most powerful force in the whole world of
investing. If you miss understanding this concept, you'll miss one
of the most amazing miracles in the world.
If you'd like to ask me a question, please use the Snicko
contact page. I read them all, and I'll try to answer the most
pertinent ones in this series of articles.
Take care, and God Bless,