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If you're new to investing and you're looking for a simple way to get started quickly, consider these steps:
Step 1. Write a basic investment plan
Step 2. Put your plan to work
Step 3. Keep your plan up-to-date
As a new investor, there is some good news for you. You have the great advantage of starting with a clean slate. You don't have any bad habits to unlearn. You don't have the usual baggage that more experienced investors carry around with them, like
- stocks that are losing money
- false assumptions about how the market works
- overconfidence in your ability to 'beat the market.'
As a new investor, you can write your plan and build your portfolio from scratch, without having to worry about correcting old mistakes or fixing old problems. You can use the best practices of top investors, and customize them to fit your style, personality, and aptitude. You can design your plan any way you choose, and you can make it as automated as you want. Here are the basic elements of a simple but powerful investment plan.
First, write down at least two goals you want to accomplish with your investments. For example, you might want to retire by age 55. Make this general goal more specific, and more useful by putting a number on it, like "I want to have $750,000 in my 401k account by December 31, 2032." The more specific you can be with this part of the process, the better.
Another example might be something like "I want to have $15,000 in my Schwab brokerage account by June 1, 2015. This will be used for launching my online cooking class website." Be specific, be detailed, and be bold. These goals will change and develop over time, and you will be constantly monitoring you progress towards achieving them.
After you finish writing down your goals, you're ready to start building the portfolio structure. Since you're a beginner, this part will be easy. As long as you have at least 20 years until you retire, you can put most of your money into stocks, as opposed to bonds or other kinds of investments. Here's what I recommend:
-If you have 20 or more years until retirement, put 80% of your money into stocks
-If you have 15 - 20 years, put 65% into stocks
-If you have 10 - 15 years, put 50% into stocks
-If you have less than 10 years, put no more than 40% into stocks
For the rest of your money, you can either use bonds or money-market funds. I'll cover that in a later section. For now, you should have an asset allocation strategy that is comprised of 80% stocks and 20% bonds, or whatever you time frame works out to be. Once you have this figured out, it's time to pick the specific investments.
For the specific investments in your portfolio, I recommend very broad-based mutual funds or ETFs. For example, you could choose Vanguard Total Stock Market Index Fund (ticker VTI) for U.S. stocks. For non-U.S. stocks you could use the Schwab International Equity Fund (SCHF). And for bonds you can use the Vanguard Total Bond Market ETF (BND).
If you already have accounts set up to put your plan into action, you can get started right away. If you don't, then take some time right now to figure out what kind of accounts you will need, and which brokerage service would be the best fit for your needs and circumstances.
At the minimum, you're going to need a taxable account and a tax-deferred account. I suggest that you contact your accountant, or if you don't have one, then talk to your financial adviser. If you don't have a financial adviser, talk to your peers and get someone to recommend a name to you.
Once your accounts are open, and your trades are executed, all you have to do is stay on top of things. I recommend that you set up a schedule of regular reviews, perhaps on a quarterly basis at first, and annually after that. During these reviews, you'll figure out how far your allocations have strayed from their original percentages due to changes in the market. If a fund that you own has changed in price by more than 10% it's probably a good idea for you to rebalance that position by buying or selling shares.
Once you get comfortable with the quarterly or annual rebalancing procedure, you can sit back and let your money, and the market, work for you.
Want more? Get your Free Beginner's Guide to Investing at http://www.zeninvestor.org/ With 25 years of experience in the investment planning industry, Erik Conley will show you how to invest with calm, clarity, and confidence.
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