To some, investments seem like the Las Vegas segment of a financial plan; you bet your wages on an investment and hopefully watch your chips accumulate on the road to wealth. If you ever watch cable investment networks it sometimes feels as if the average person is just a lucky investment or two away from riches. The truth, however, is that the professionals we see on television, work all day, every day tracking the market, compiling data, and using mathematical algorithms to choose investments. The secret to investing successfully, if there is really any secret, is first recognizing that any sexy, get-rich-quick ideas are generally surefire strategies for a new investor to lose all of their money.
It can also be easy to be fearful and just avoid investing altogether. The trouble is that if you never invest money, you’ll never keep up with inflation. Worse yet, you’ll have to earn dollar for dollar whatever you want to spend later. If you ever want to stop working – or be able to focus all of your time on the things you want to do rather than have to do – investing is a critical part of your financial plan. Imagine that you’re not working anymore and you’ve never invested….only saved money into a bank account. How much money do you need? You’ll need to have money for every meal every day and that’s just for starters! Accumulating this pot of money without investments is close to impossible.
Here’s how successful investors work their magic. They begin by imagining their investments as a separate person who goes out and earns a living every day. You purchase an investment with a small sum and your funds go to work each day, as do you. At the end of the day your money brings home some more money. On a few days your investment comes home empty handed, or worse, loses some of your money. Imagine that you had an employee on your payroll like this? What would you do?
Well, the first thing you’d probably do is to tell your employee exactly what they’re trying to achieve. I’ve had jobs (and I’m sure you have also) where my boss was unclear about what we were actually trying to do. Because of this, nothing really got done. On the other hand, I’ve worked for people who were laser specific about their objectives, and all of the employees were able to quickly complete the job. By having clear goals about your money, it’s easier for your money to multiply.
With clear direction, it’s also easier to decide if your money is actually completing the job you’d hoped. When I worked for unclear bosses, it was easy for bad employees around me to get away with laying down on the job. Because the boss didn’t know what she wanted, it was impossible for her to evaluate her staff. My best employers had a clear idea of their goals. They were quick to spot those employees who weren’t meeting the challenge and could let them go if necessary, or reassign them to other tasks that better suited their skills.
Here’s how this correlates to investments: different investments work best under different conditions. Some investments, such as CDs and money markets, are wonderful for short term goals. Others, such as small company stocks, are great ways to make money over long periods of time, but historically are far too volatile for short-term goals. By knowing your objective you’ll be able to weed out thousands of investments that don’t fit into your plan.
Once you’ve narrowed the field of investment choices based on the time frame, then you can look for tax shelters. Not surprisingly, knowing your goal helps here, too. Some shelters, such as Roth and Traditional IRAs, are great if your objective falls after you turn a certain age (in this case, 59 ½). Others, like 529 plans and Coverdell IRAs, work best if your goal is education. Being clear about your direction won’t just make research easier; it makes it possible for you to save money on taxes, too!
So, remember, if you’re curious about investing, ignore the cable investing hot-stock-tip shows. Throw away the “investment of the month” magazine. Discard your Las Vegas get-rich-right –now ideas. Embrace the idea of treating your money like an employee and creating a set of goals for him to follow. Soon you’ll be on your way to picking investments that will meet those goals.