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Money Coach

Getting Into the Pool

Now that you’re ready to get into the pool are you going slowly, step by step; jumping into the shallow end; or diving in off the high board? New investors will commonly start off small and build as they feel more comfortable. There’s nothing wrong with this approach. If your initial investment doesn’t perform as you hoped, it may give you a “real” indication of your risk tolerance level. One investor will lose $1,000 in a good investment gone bad and shrug it off, saying, “I’d take the same chance again in a similar investment,” while another might say, “I’ll try something a little safer.”

Dollar-cost averaging is popular with new investors, particularly in mutual funds. This has you investing consistently by putting in steady amounts. It allows you to maximize your number of shares when the price is low while also still investing when the price is high. By automatic withdrawal from a bank or money market account, the money is invested steadily for you, taking away the responsibility and decision of when to add more money into your investment.

Here are some more tips for getting in:

1. Set realistic expectations for your investments. Unless you play the lottery or hit a “jackpot” you won’t score big instantly. Investing is a way of watching your money grow, and growing takes time.
2. Start sooner than later. No, you can’t turn time back and start young, but remember that money builds over time. If you are able to start investing regularly at age thirty-five, by the time you’re sixty-five your money will have had thirty years of appreciation. This doesn’t mean you can’t do very well investing in your forties or even fifties, but it’s always to your advantage to give your money time to grow.
3. Prepare to be proactive. The day you invest is not the day to stop doing your homework. Managing your assets is also not solely the job of a mutual fund manager, broker, financial consultant, or anyone else. Many people who are invested in 401(k) plans or other long-term retirement plans forget that they have the flexibility to move their investments around within the plan. Start off by being aware and ready to follow your investment.
4. Just Do It! This is not by any means saying that you should not do your homework, and is not contradictory to the previous advice. However, it means that there is a ton of information available and at some point you have to stop investigating and (once you feel you can make an informed decision) as Nike says, “Just Do It!” Too many people are at the starting line with a stock or mutual fund, only to wait just one more week . . . okay, just one more week . . . and so on and so forth. You need to reach a point where you are simply ready to get into the pool.
5. Diversify. The idea that diversification means you need to have large sums of money invested and/or be a more savvy investor is incorrect. Mutual funds can immediately, for even $500, have your money diversified. You too can take your initial investment and spread it around to some degree. You could, for example, take $2,500 and invest $1,000 in a bond, and $500 in a mutual fund, and $1000 in three different stocks. It’s easy to diversify within an asset class and allocate your assets accordingly.
6. Manage your risk. Look at investments that best combat the risk you are concerned about, be it inflation, taxation, liquidity, or all of the above. Allocate your assets across different asset classes and try to cover the various types of risk associated with investing.
7. Pay yourself first. You’ve heard it said before, but it’s true in investing as well. Once you’ve paid your monthly bills and made sure your expenses have been covered, you should then add to your investment. Having direct deposit from your paycheck makes this easier, but if it’s up to you, make adding to your investment(s) a regular part of the process.
8. Reinvest your earnings. Many investments, including mutual funds, will do this for you, but it’s to your advantage to keep your income working for you unless you need it for a specific purpose.

Published Aug 18 2006, 12:55 AM by moneycoach
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