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Being Realistic

When it comes to investing one of the best things you can be is realistic.  An investor needs to be realistic about their experience, goals, and  expectations.   Firstly if you do not have adequate investment experience there is help to be obtained.  Many books, videos, and seminars are made readily available to assist.  Most, if not all brokerage firms offer some form of investor education.  It will continue to pay dividends, no pun intended to invest in your individual knowledge about investing and investing products.  The reason that goals and expectations were listed separately is because they take on different levels of importance for each investor, and must be considered separately.  Investing goals can include things such as: saving for education, retirement, or investing extra savings.  An investment expectation is what you expect the results of the investing to be.  For instance, you save/invest $200 per month for 2 years ($4,800), with the expectation that at the end of two years it will grow to at least $5,500.  The expectation that the funds invested over two years could reach $5,500 is realistic.  What is not realistic is for an investor to decide to invest $10,000 with the expectation that it will grow to $100,000 in one month’s time.

Taking On Risk

Investing is sort of like running track, in the sense that the person who puts in the most can expect above average returns.  Three things that help to increase returns for investments are time, amount, and risk.  Over longer period of times investments have more room to grow and rebound from any fluctuations in the market.  Amount is important because when you invest more you increase the chances of getting returns.  More invested does not mean all though, you should never invest more at a given time then you could comfortably afford to lose.  Risk is one of the greatest considerations when factoring in returns, because the more risk you take on the greater the potential returns that exist.   Stocks have historically had the greatest risk and highest returns among the three major asset categories.*  Included in the three major asset categories are stocks, bonds, and cash.  People who invest in stock would naturally expect a higher return due to the fact that they have taken on more risk.  Whereas someone who has invested in cash would be willing to accept a lower return for the knowledge that their funds typically do not experience extreme fluctuations in value like stock or bond investments.

Appropriate Asset Allocation

Asset allocation involves finding the right mix of stocks, bonds, and cash equivalents for your portfolio.  As stated earlier in the Taking On Risk section, time and risk will play big parts in determining the right mix.  Typically younger investors who are further away from retirement or people without an immediate need for the funds will tend to have allocations with robust stock components.  Older investors, people close to retirement, and those with a near term need for funds will tend to have large bond and cash components in their asset allocation.  On the low end of the asset allocation spectrum are your conservative investors, and on the other end are the more aggressively inclined investors.  Each asset allocation profile has its on return profile over a period of time; say a year or five year time frame.  Below will be a sample suggested allocation breakdown that highlights returns over a 10 year time period (for illustrative purposes only, average returns could be different now, and appropriate mix is based on many variables).  Suggested Allocation Breakdowns *1
  Suggested Allocation Breakdowns *1
Suggested Allocation Breakdowns *1

Aggressive



   20% Large-Cap Stocks

   20% Mid-Cap Stocks

   20% Small-Cap Stocks

   20% International Stocks

   10% Emerging Markets Stocks

   10% Intermediate Bonds

   0% Short-Term Bonds

Moderate



   20% Large-Cap Stocks

   20% Mid-Cap Stocks

   10% Small-Cap Stocks

   15% International Stocks

   5% Emerging Markets Stocks

   30% Intermediate Bonds

   0% Short-Term Bonds

Conservative



   25% Large-Cap Stocks

   10% Mid-Cap Stocks

   10% Small-Cap Stocks

   5% International Stocks

   0% Emerging Markets Stocks

   40% Intermediate Bonds

   10% Short-Term Bonds

Aggressive Portfolio Return

YTD:

2.7%

1 yr:

9.6%

5 yrs:

11.6%

10 yrs:

8.2%

Moderate Portfolio Return

YTD:

3.0%

1 yr:

8.5%

5 yrs:

10.1%

10 yrs:

7.4%

Conservative Portfolio Return

YTD:

3.4%

1 yr:

7.8%

5 yrs:

8.9%

10 yrs:

6.4%

 

* http://www.sec.gov/investor/pubs/assetallocation.htm

*1 http://www.aaii.com/asset-allocation








 
 
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One of the most important things that you can do as an investor is to understand what you are putting your money into.   In the words of Warren Buffet, “Never invest in a business you cannot understand.”  With tons of investment options available, the question becomes what’s appropriate for you.  Some options for investments include things like: stocks, bonds, mutual funds, commodities, options, and currencies.  Take for example the complexity of Options Investing, for the importance of knowing what you are invested in.  On a basic level you have call and put options.  A call option gives a buyer a right to purchase shares of an underlying security at a specific price for a certain time period.  A put option gives a buyer the right to sell shares of an underlying security at a specific price for a certain time period.  From there Options Trading can get even more intense, and not understanding the dynamics could lead you to owe thousands of dollars you do not have.

Trend Investing

With Investing following the trends could be disastrous for your portfolio.  What is right for Investor A may not be right for Investor B.  Everyone has different investment timeframes, and tolerances for risk.  There are no guarantees with investing, and no way to predict how long your trend investment will be hot for.  Deciding to invest in something the vast majority of people are investing in is not bad if done for the right reasons.  For example, consider a newsletter that has 30 thousand followers.  All 30 thousand individuals will receive the same advice about the investments recommended or reviewed.  The question you always have to ask yourself is how an investment fits into your overall portfolio.

Doing Your Research

Doing good research is critical to being a better investor.  Today people look at reviews for everything from movies to dentist appointments.  Places like Yelp, and Tripadvisor put reviews right at your fingertips.  The same due diligence that people put into finding activities and services can be applied to investments.  Some things that can be reviewed to make informed decisions include: analyst opinions, financial statements, news, ratings, and returns.  One of the best places to begin your search for answers is the Research Page of your broker.  Other helpful links are below.

http://www.morningstar.com/

http://www.investopedia.com/

http://www.cboe.com/