When it comes to investing, you might be on the inexperienced side now, but it doesn’t mean you can’t learn some basic investing smarts. If you develop a solid understanding of your overall financial picture you will be off to a good start. As mentioned earlier, it’s also important to double-check that you are in a secure financial position before investing. A little financial checkup may be in order. Do one final check to see that:

1. You are not behind in your payments on credit cards, or on outstanding loans or operating in the red.
2. You are not investing money that has already been earmarked to pay a line item on your budget.
3. You have some easily accessible cash in a bank account or money market for emergencies or unexpected cash flow problems.

Next, it’s important that you understand some of the basics. A few key investment concepts for you to review are listed here.

1. Asset Allocation

According to a study in the Financial Analysts Journal in 1991, only 7 percent of successful investing depends upon the selection of specific stocks, bonds, or mutual funds. The other 93 percent of successful investing depends upon selecting the right asset classes in which to be invested, as well as when to be invested in them. The question of whether you should be invested in CDs, the stock market, the bond market, real estate, money market funds, precious metals, global investments, and so on is, therefore, the tantamount question that precedes which mutual fund or stock to buy. Essentially, it’s a matter of deciding which mode of transportation is best for you before deciding which airline to fly on or which car to rent.

Henry Block, financial analyst and president of 5Star Management, a money management firm in Salt Lake City, Utah, notes that the wealth of advertising on television, radio, and in print is designed to promote specific investments, telling you how the investment has faired. “All of this is focusing on the 7 percent of the equation. Very little is done out there to help the average person on the street focus on the 93 percent of the equation, which is what I emphasize,” explains Block, who adds that the 93 percent basically says that a rising tide raises all ships. “While an investor can run around deciding whether to invest in a tug boat, a sail boat, an ocean liner, or a cruise ship, he or she needs to appreciate the fact that all the ships will rise or fall with the tide, which holds true for investments in a particular asset class.”

Within the broad grouping of asset classes (stocks, bonds, mutual funds, etc.) there are more specific asset classes. For example, equity mutual funds include large-cap stocks, medium or mid-cap stocks, and small-cap stocks (“caps” equate to the size of the company in regard to their assets), plus various sectors such as utilities, technologies, energy, and financial. There are cyclical stocks, and a host of industries such as the auto industry, airline industry, and so on. Each of these sectors and industries can be defined as a different asset class with very different behavioral characteristics. The stocks within that asset class will most often behave according to how that asset class is doing as a whole more than according to the fundamentals of a particular stock or bond. If, for example, IBM reports below-expectation earnings, then (in most cases) so will Apple, Intel, and the entire industry, unless there is a particular story centering around IBM, such as a merger or lawsuit, etc. The same holds true with funds. Asset classes perform in specific ways, the most notable being the tech stocks and tech stock funds of recent years. Surely, you can find an Internet stock that is the exception to the rule, but by and large, the sector has grown universally.
Asset allocation, therefore, means determining how much of your assets you are putting into each kind of asset class. You will ultimately allocate your assets into stocks and/or equity funds, bonds and/or bond funds, money market funds, real estate (including REITs (Real Estate Investment Trusts), or other types of investment vehicles based on the following factors:

1. Income level
2. Amount of money you have available to invest
3. Level of investing sophistication
4. Ultimate use for the investment, or goal (retirement, college, etc.)
5. Age
6. Time frame until reaching your goal
7. Level of risk/tolerance

But how do you distribute them?

Combining these factors, you’ll determine what is the right breakdown across asset lines. For example, you might want an 80-20 split between equities and bonds or vice versa.

Generally, as investors get closer to their goals, they will become more conservative, particularly if money is earmarked for retirement. Approaching retirement, many investors will put a higher percentage of assets into safer investments with lower fundamental risk. The thinking is often that if you lower your amount of assets in equities and switch to bonds and cash instruments as you approach retirement, you will have a steady flow of income with less risk.

Another theory, however, would be that since on the long term the stock market has always done well (and the average life span may be twenty years beyond a retirement at age sixty-five), you might be just as well off keeping a reasonably high percentage in equities. The equities will grow, and if you should need income you can always sell a stock. Retirees need not invest so conservatively that the money is no longer growing over the next twenty or even thirty years. Karen Altfest of L.J. Altfest and Company, New York–based financial planners, notes that many people are also investing for two generations. “Many people want to invest for their children, and they don’t want the money to stop growing or stop producing when they die.” Retirees today need a certain amount for living expenses and various wants and needs, so that part is invested in a more conservative vehicle. Beyond that, the approach may be somewhat more aggressive to build up money for the next generation. Ms. Altfast adds, “It’s not only a case of leaving money to family.” She cites one client who does not have a family but wants to leave his money to an animal shelter that he cares very much about. “People have plans beyond their death,” she notes.
The theories vary, but the main idea is to allocate your assets in line with the factors mentioned here and remember that everyone’s situation is different. Do not let financial planners talk you into more-or-less conservative investments that are not right for your personal needs.

Some Suggestions

While I can’t emphasize enough that your investment strategy must be based on your individual needs and goals, I can still offer a few broad portfolio planning strategies for allocating your funds. These are merely a few allocation breakdowns to give you a ballpark look at what you could do in various situations, tailoring them to meet your needs, income, age, etc.

1. If you have a long-term plan, with a ten- to fifteen-year goal, you might start with a more aggressive approach to asset allocation, going with at least 85 to 90 percent in equities, including 25 percent in an international fund and 20 percent in emerging growth funds or small-cap companies.
2. If your goals are coming up in seven to ten years, such as having a child in grade school and saving for college, you can still be somewhat aggressive, with a small amount of international holdings as part of an 80-20 or 75-25 equity-bond split. You can balance your bond fund between conservative and aggressive bonds or bond funds and have some cash investments as well.
3. If you are looking at reaching your goals in four to seven years, such as having a high-school-aged child heading for college, you may want to lean toward an even split between safer bond investments and equities. In this case, however, you should be opting to invest in more established companies (even some that pay dividends) than going for the higher-risk stocks.
4. If you are reaching retirement, it’s usually, though not always, the time to go in the low-risk safe direction. A 75-25 split with bonds leading the way may be the right approach. Once you’ve established a safe, income-producing portfolio, however, unless you are adverse to risk, you can use the last 5 to 10 percent to play with a riskier equity fund.

These are just some very basic allocation ideas. There are a variety of ways to split up or allocate your assets within the stock or bond market, and real estate, cash instruments, and other investments will also come into play. The overall asset allocation that is right for you will depend on your specific goals, needs, and time frame to reaching your goals. Investment experts agree -- and I agree with them -- that allocating your assets properly will provide piece of mind as well as a good game plan toward reaching your overall goals.