Investing Made Easy

July 18, 2016

Can investing be easy? How can you become a more informed, savvy investor without learning a lot of extra financial jargon? Investing really doesn’t have to be that hard. Consider following these three simple principles:

Know Yourself

Successful investing starts with knowing yourself: how you like to make decisions, whether you like advice or you like to do it yourself, and what you do when the going gets rough. The first step is to figure out your investing risk tolerance, which is how much of your invested money you’d be willing to risk losing in order to make a profit. Try and quantify that in real dollar amounts, e.g., you have $1,000 to invest, and you’d be willing to risk it going down to $900 (a ten percent loss) in order to have a good shot at ending up with $1,150 (a fifteen percent gain).

Would that change if your investment was $10,000 or $100,000? Are you a conservative, moderate or aggressive investor? Make sure to take a risk tolerance questionnaire like this one to double check your assumptions.

The next step is to ask yourself how involved you want to be in the day to day management of your investment portfolio. Are you more of a “hands-on” or a “hands off” type? A hands-on investor is actively involved in designing a portfolio, setting target weights for different types of investments and monitoring/re-balancing the portfolio regularly. A hands-on investor may favor individual stocks or actively managed mutual funds or setting up their own asset allocation (mix of investment types) of index mutual funds. The hands-off investor is looking for a one-stop shopping solution and is more likely to favor pre-mixed portfolios like target date mutual funds or use a robo-advisor to set the strategy and automatically re-balance.

Finally, ask yourself if you like to do it yourself or if you’re the sort of person that likes advice. There are many options for do-it-yourself folks, including low-fee financial services firms where you can invest on your own without an advisor. If you are the type who likes having a coach, consider working with a fee-only CERTIFIED FINANCIAL PLANNER™, professional who is paid only by clients and not by commissions or brokerage fees. Make sure to check your advisor’s background with FINRA or with the SEC if they’re a registered investment advisor.

Set a Clearly Defined Goal

When will you need to use the money? Certain types of investments are better suited to certain time periods due to their levels of risk. If you need access to the funds in less than three years, stick with very low risk investments like savings accounts, money market funds and CDs. A stock fund is no place for your savings for a home down payment!

If you will use the money in three to seven years, consider adding some high quality bonds or bond funds. Adding in stocks makes more sense for goals of seven to ten years or longer, like your retirement account. The longer your time horizon until you need the money, the more you can consider adding stocks and stock mutual funds to your portfolio.

How much do you need your investment to be worth in order to make your goal? That’s called your “investment return.” Take the home down payment scenario: The most important thing is that you don’t lose any money, and your investment return is secondary. However, with a large, far-off target like retirement, you may need to achieve a 6-7% average annual return in order to meet your goals.

Match Investments to Your Goals and Preferences

Your investments should match when you need the money (time horizon), your required growth (required return), your investment risk tolerance and whether you are hands-on or a hands off investor. According to fellow CFP® Kelley Long, choosing investments is a lot like choosing a pizza.  You can customize it to fit your tastes.

For a longer term, aggressive investor, you could consider adding 5 to 10 percent in stocks to a typical portfolio mix (for example, moving to a 70% stocks/30% bonds instead of a 60/40 mix). A more conservative investor would add 5-10% to their bond allocation (a 50/50 mix using the previous example). The bottom line is that with some easy tweaks, you can customize your investment portfolio to suit your tastes.

How do you make your investment decisions? Email me at [email protected]. You can also tweet them to me @cynthiameyer_FF