iStockphoto
Nowadays, anyone can start investing with a very small amount of money. Because of the proliferation of retail investment products available, you can invest as little as $100 into a basket of stocks and bonds. For a rookie investor looking to learn how to start investing, I would generally recommend staying away from individual stocks.
1. Determine Your Investing Timeline
This goes hand-in-hand with liquidity needs. What are you investing for? Is it truly extra money you won’t need for a while? Are you investing for your retirement in 20 or 30 years? For your children’s college education? Is this a short-term investment? Something you may need in two to three years? The general rule is: For shorter timelines, go with less volatile, “safer” investments (bonds or other fixed income instruments). For timelines longer than five years, it’s OK to invest in stocks.
2. Develop a Plan
A written plan, called an Investment Policy Statement (IPS), helps you get organized, clarifies your goals and determines the criteria of your investments. These may be paying for a child’s college education, funding your retirement or just growing your wealth. The IPS will dictate the amount of return you need on your investment and how soon you’ll need it. This in turn will determine the amount of risk you may need to take in order to achieve a desired level of return and how and where you are going to invest it. There are many low-cost online brokerages (e.g., Schwab, Fidelity and Scottrade) where you can easily open an account with a small amount of money.
[More from Manilla.com: Financial Tracking & Budgeting Resources]
3. Find Your Comfort Zone
Because all investments come with varying degrees of risk, you need to assess your risk tolerance. Being in your investing “comfort zone” means owning a portfolio that contains suitable, well-researched holdings that are in perfect alignment with your various goals, time horizon and risk tolerance. Determining your risk tolerance is a complicated subject — look online for information.
4. Determine Your Mix: Asset Allocation
Your asset allocation is the way your portfolio is divided between bonds, stocks, and cash and should be based on your specific goals, risk tolerance and time horizon.
A general rule when constructing a portfolio is that you should have your age in bonds in a typical stock and bond mix. So, if you’re 40, you would have 40 percent of your portfolio in bonds. Basically, the younger you are, the more risks you can take (e.g., tilt your portfolio more toward stocks). They are generally more volatile, but have higher long-term returns versus bonds.