Simple Steps for Investing By Christina Mae Olson, CFP®

Are you an investor? Are you deferring some of your pay into your employer’s 401(k), 403(b), 457 or some other pension plan? Do you have an IRA or a ROTH IRA? Do you save extra money in a brokerage or mutual fund account? If you do then you are an investor.

The most important component of investing is to just do it. It’s that simple. If you aren’t saving then you aren’t investing. Second to “just doing it” is choosing the right investments. People want to know if they are investing their money properly. Many people don’t save or invest any money at all because they just can’t decide where to put it. How do you know? How can you really know if your fund choices are right for you?

The basic steps to investing are simple:

  1. Pick a good stock/bond mix.
  2. Select diversified investments to achieve your stock/bond mix.
  3. Monitor your portfolio.

First, pick a good stock/bond mix. Your mix will depend on your age and your tolerance for risk. The younger you are – more of your money should be in stocks. If you are 25, for example – you should probably have 85% or more of your investments in stock mutual funds and 15% in bond mutual funds. If you can tolerate the risk of stock market fluctuations then 85/15 is a good mix for you. Stocks are more volatile than bonds so if you don’t like the risk then reduce your stock portion a bit. If you have more than 10 years to invest – I advise people to take more risk. In any given 10 year period over the last 100 years – growth stocks have not lost value and have actually averaged over 10% annual returns!

Did you know that your money doubles in value every 7.2 years if invested at 10%? If you had invested $50,000 in a stock mutual fund in 2000 it would be worth $100,000 today. It could grow to $800,000 by 2028. If you added to this stash periodically it might total over $1 million by then. What if, on the other hand, you bought and financed a new $30,000 car in 2000? You could have easily paid $50,000 in principle and interest toward that car. Would you rather have a cheap old rusty 2000 car today or $100,000? But, that’s another story.

Next, select diversified investments to achieve your stock/bond mix. This isn’t as hard as you might think. The best choices are so-called “index” mutual funds. Index funds provide instant diversification over hundreds of companies. The science of picking the funds has been done for you by the experts. Most employer retirement plans (and all mutual fund companies) have excellent index mutual funds. You don’t have to pay a broker to pick these funds for you. An S&P 500 Stock Index mutual fund outpaced 80% of all other stock funds in 2006. Index funds have extremely low expenses. Pick a Total Market Index Fund, an International Index Fund, a Total Bond Index Fund and a Growth and Income Index Fund for your mix of funds.

The last step is for you to monitor your portfolio. Yes, you have to pay attention to this occasionally. You need to “rebalance” your mix of stocks and bonds so the mix doesn’t get out of whack. If stocks do really good in one year then you will need to shave off the gains get back to your original mix. Don’t micromanage your funds – once or twice a year is enough.

Happy Investing!

Chris Olson is a Certified Financial Planner™ practitioner with a fee-only private practice. You can reach her at 608-525-9818 or CMOney@centurytel.net.