Dec 23

Getting started with investing

Getting started with investing

So you’ve come to the realization you want to be in control of your financial future. Rather than pay someone to manage your money for you, you’ve decided to invest yourself. As intimidating as this process may be, don’t panic.

Understanding the basics

There’s an old joke, to make a parrot into an economist all you need to teach him is to say “supply and demand.” As you delve into the world of investing, you need to understand the concept of supply and demand. When supplies are plentiful — there are more sellers than buyers — price drops. When there is a lot of demand — there are more buyers than sellers — price increases. This simple principle guides all sorts of financial transactions.

The starting line

Common thought suggests beginning investors put their capital into either mutual funds or annuities. Mutual funds are managed portfolios that are relatively safe options but may hold hidden surprises like fees for the portfolio manager or researchers, unexpected capital gains, and their resultant taxes, or dramatic shifts when the market closes. Annuities also seem like a safe option, promising stable returns over time, but remember that the company behind the annuity also wants to make money and may charge hidden fees. So, while these two options are relatively safe, it is in your best interest to look beyond these into places where more profit can be found. Fxtrade777

Rule #1: Strategic planning

Dwight D. Eisenhower once said, “I have always found that plans are useless, but planning is indispensable.” In this context, you must be realistic and reasonable in your planning. Only you know your risk tolerance level, the amount of time and capital you can invest, your personal limitations, and what your profit goals are. Keep in mind your end goal, and plan toward that.

Remember that most investing is a long-term commitment. If you focus solely on the day-to-day rise and fall of the stock markets, you’ll lose sight of your long-term financial goals. Decide ahead of time if you’re in investing for current income growth, long-term income, or both. Each of these options requires different strategies and levels of involvement.

When doing your financial planning, keep in mind one inevitability: taxes. Normal investment accounts (mutual funds, ETFs, individual stocks, etc.) all are subject to capital gains taxes. Traditional IRAs or 401(k) accounts are funded by pre-tax dollars and grow tax-deferred but are subject to taxation when withdrawals are made. On the other hand, Roth IRAs are funded by post-tax dollars, grow tax-deferred, and are not subject to taxation when you withdraw money. If you don’t take taxes into account while planning, you can plan on less income than you expected.

Rule #2: Minimize losses, maximize gains

The name of the game in investing is to try and minimize your losses while maximizing your gains. Seems like a no-brainer. Obviously, it’s a little more complicated than that, or else everyone would be making money hand over fist. Some investment schools of thought recommend a minimum of a 3:1 reward/risk ratio for each potential trade. That way, even if you lose money on some trades, you’ve more than made up for those losses on other trades.

As noted above, this is all predicated on supply and demand. Learn to see when the supply and demand are out of balance, and pounce on those opportunities. With practice, you’ll be able to make fairly accurate predictions. Knowing when to stop your losses is an essential part of successful investing. Good luck, and plan wisely.