How to Become a Wise Investor

Stocks are long-term investments.

Investing for the future is critical; yet, it can be very difficult to get started. The stock market intimidates many new investors, who are afraid of losing money. Others are unsure how to allocate their funds among stocks, mutual funds and safe investments like certificates of deposit and money market funds. Taking the time to evaluate your own situation and learn about available investments is one of the best ways to overcome that fear and get started with your investments.

Instructions

1. Divide your goals into short-term and long-term categories. Things like saving for the down payment on a house or putting away money for a car are short-term goals. Saving for retirement and putting money aside for a college education are long-term goals.

2. Use only safe, guaranteed investments for your short-term savings goals. Some examples of guaranteed investments include certificates of deposit and money market accounts from FDIC or NCUA-insured banks and credit unions. These savings vehicles typically do not pay a high interest rate but do keep your money safe.

3. Focus on costs and tax efficiency as you research investment vehicles for your longer-term goals. A simple index fund is an excellent choice if you are just getting started with stock market investments. These funds do not attempt to time the market or pick stocks. Instead, they simply buy and hold all the stocks in the index they track. Over time, index funds have had an excellent track record, beating the majority of managed funds while operating at lower costs.

4. Contribute as much as you can afford to your 401(k) or 403(b) plan, if your employer offers one. Every dollar you contribute to a 401(k) or 403(b) is deducted from your taxable income. That means a lower tax bill now and the possibility of significant growth later.

5. Track your investments regularly, but do not obsess about short-term moves in your long-term investments. Remember that the money you put into the stock market is intended to be a long-term investment. While you may see wild swings day to day, investing for the long haul gives you time to recover and time to add to your investment at bargain prices.

References

• FDIC: Your Insured Deposits
• The Motley Fool: Expense Ratios