Setting Up Your Investment Strategy

by YourFinancesSimplified on October 5, 2012

It’s important to remember the rules of smart money management when deciding where to invest your nest egg. Keeping a good balance of availability, rate of return, and a guarantee of funds can seem difficult for the uninitiated, but it doesn’t have to be hard. Follow these short, simple rules and you’ll feel far more confident in where and how you invest your savings.

First, consider the funds that you will need access to over the next five years. This includes emergency money (e.g., car or roof repair), savings for specific high value purchases (e.g., a new television or house renovation), or any other liquid funds (e.g., money set aside for future bills).

This money needs to be available more than anything else, and so should be kept in an extremely safe place, like a regular savings account. You might get away with trying to get as high an interest rate as possible, but be wary of tying up your money here; this is the portion of your money that needs to be easily liquidated.

Next, consider money that you do not expect to need in the next five years, but which you cannot do without for at least ten years (e.g., money you’ll need if you lose your job or for long term purchases like a new car or house upgrade). If you’re starting retirement or are beginning to get a bit older, the majority of your savings should be in this category.

These are funds that you are okay with tying up for a few years, yet are not okay with taking a loss on. Your local bank or credit union will be able to set you up with a long term certificate of deposit or a United States savings bond that should help you get a fair return on money you won’t need to touch for a few years.

Finally, consider the savings you will not need for the next decade (i.e., money that you could lose without significant financial strain). This is especially important for younger investors, as they can get away with putting a larger proportion of their savings in this category and consequently gain a far larger return.

The savings allocated to long term investments will best be put into mutual funds. For those that aren’t interested in learning all about mutual funds, the best bet is to put everything into an index fund. Index funds are generally the safest of all mutual funds, and are definitely the best for newcomers. Experts might be willing to undergo a bit more risk after doing enough research to see which mutual funds they prefer, but it is strongly recommended that this not be attempted unless you really do your research.

Follow these simple steps and you’ll be well on your way to an intelligent investment strategy. Just be sure to speak with a financial advisor before making any major decisions, and never underestimate how much money you’ll need in the next five years. Click here to read more information.

{ 1 comment… read it below or add one }

Scott H. November 23, 2012 at 12:14 pm

It’s really easy to set up tiers of investing and saving. A great simple strategy is to break them up among risk/reward and timetable. The strategy should be consistent and avoid fees as much as possible.

So for investing, the rainy day fund should sit in a money market account. Finding an online checking out that pays interest is relatively easy now and can be funded with next to nothing.

Then to get your foot wet the majority of investing should take place in long term accounts, such as 401(k)’s or even individual accounts that do not trade often. Trading is an awful way to lose money. Consider a commission free ETF account with a broker. Add money to this when possible and index the world.

Finally take a smaller portion of the savings, perhaps 20% and use this for single equities like dividend paying stocks and blue chips. You can use direct stock purchase plans to cut fees out completely and just let your earnings DRIP for years. You’ll likely make more than the ETFs in the short term so it is a more moderate term account.

If there is a small percentage left that you can afford to lose and would like to learn something more, then perhaps you could take on something like Forex, but it would have to be less than 10% of your investments.

The long story is that trading too much as well as commissions and fees eat away at everyone’s earnings.


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