The Handy Investing Answer Book. Paul A Tucci
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experts agree that you must first establish how much risk you are willing to take, since different portions of your total investment will have different risks and different potential returns. If you are averse to risk, you cannot expect to have investments that earn double-digit returns, since those types of investments tend to have more risk associated with them.
Why is attaining great financial goals easier than we think?
Great financial goals are actually a series of small financial goals. If you make saving and investing and the general management of your money a priority over a long period of time, each of your financial goals is attained. If you do anything in small incremental steps, larger goals are attained over time. And because the changes can be small steps, it is actually very easy to attain large financial goals.
What are some further steps we must take in order to establish investment goals?
Expert investment managers assert that we need to decide several important subgoals in order to establish our investment goals. These subgoals may include the ultimate use for the money, the time horizon for when the money will be needed, the amount of money needed, how much money we have already saved, what types of investments might help us achieve our goals, and the current performance of all types of our investments.
How much time is considered to be short-term, near-term, and long-term?
It is generally accepted that short-term goals may require one to two years, near-term goals may require five to seven years, and long-term goals may require 10 or more years.
What types of goals should I consider before I begin to invest?
You should consider your goals for the use of your investments, in terms of short-term, near- or medium-term, and long-term. Within short-term goals, you might include such items as travel, large consumer purchases, marriage, or health care-related expenses, and perhaps even current income. Within the near- or medium-term category could be such goals as capital for a home purchase, repairs/renovations on a principal residence, creating a business, or acquiring a second home/rental property. Long-term goals could be such items as funding higher education, retirement income, or passing wealth to heirs. It is important to note that your goals may change, especially short-term goals, as your ideas and outlook changes, so you need to be flexible in establishing goals.
Even before I establish goals, what are some things that experts believe help prepare me financially for successful investing?
Experts believe that well before you begin to invest, it is prudent for you to reduce as much as you can any credit card or debt interest and finance charges you pay every month, as these payments ultimately will suppress your investment earnings. You should also have a cash emergency fund set aside that may cover three to six months of living expenses. To establish this, all you must do is identify your expenses for the past few months, and begin to find ways to save this amount to be used in case of any emergencies.
What are some other keys that may assist me in establishing investment goals?
Investing editors at U.S. News & World Report assert that in order to properly establish investing goals, you need to decide what to expect in terms of returns on your investments, set achievable goals in terms of how much you are willing to invest, determine how frequently you are going to invest, and always purchase investments you know and understand.
Even if you only started with small, piggy-bank-type savings, that regular investment can grow surprisingly large if you begin saving when you’re in your early 20s.
What is an important consideration when I think about investing for my retirement?
When you think about establishing goals in order to fund your retirement years, it is important to consider when to begin investing. You may obtain a completely different result if you begin investing for retirement in your twenties rather than beginning to invest in your forties or fifties.
How does creating specific investment goals help me achieve my overall goals?
When you have a specific goal in mind, the goal provides you needed direction, so that you may focus your attention and behaviors toward attaining this goal. A goal may help motivate you to make necessary changes so that you may attain it. Goal-setting forces you to take responsibility for your ultimate financial situation, and with this stronger feeling of ownership of your goal, you will feel successful when you achieve it.
What is the difference between “investing” and “speculating”?
The difference between investing and speculating can be a complex topic. Its origins go back many years, perhaps to the 1920s, when economists and writers tried to illuminate the distinctions between the two concepts. At this time, the only vehicle considered by many to be an investment was bonds, because they provided a steady return, and you could retrieve your principal. When an asset or a share in an asset is acquired with the hope that the investor will receive a profit from the revenue generated by that investment, in addition to retrieving one’s principal, this is characterized by many as investing. Speculation is defined by many as when someone buys a share of an asset (believing its market value may rise), holds it for some period of time, and sells it to someone else at a higher value.
How do I make decisions to buy or sell if I am investing or speculating?
When you are investing, according to author Ben Graham, you decide to enter or exit a position based upon the underlying economics or analysis of that asset. When you are speculating, you decide to enter or exit a position based in large part on your belief regarding the near-term movement of the value of the asset.
How does Forbes characterize the difference between investing and speculation?
In a 2012 article summarizing a book by Jack Bogle, the founder of Vanguard Mutual Funds, the author states there is “harm done when a culture of short-term speculation focused on the price of a stock overwhelms a culture of long-term investment focused on the intrinsic value of a corporation.”
What is the problem with speculating?
When you speculate, you make an investment or buy a stock strictly because you think its price will increase over a relatively short period of time, because of an observed trend or widely held belief. When you invest, you use your fundamental analysis of the inherent value of the asset, believing it will appreciate over time, providing you with a return and the ability to get your principal back at a later date.
What is a “risk/reward ratio”?
A risk/reward ratio is defined by many as a comparison of the expected returns of an investment versus the amount that an investor could lose with the same investment. It is generally thought that the more return one expects to make, the higher the investment’s risk.
How do I calculate a risk/reward ratio?
You may calculate a risk/reward ratio by first deciding the highest price at which you are willing to sell, as well as the lowest price at which you are willing to tolerate, and then deciding how much of your investment you are willing to lose. You divide your net profit, which is the reward (after fees and commissions) by the price of your maximum risk. Through the use of stop-loss orders, you can sell at or near your target prices.
What is a simple example of a risk/reward ratio in action?
A typical example of a risk/reward ratio in action may be if someone wants to borrow $50 from you and pay you $100 at a later date. You will lose the $50 if the debt goes unpaid. But you will make twice the amount of your investment (a 2:1 risk/reward ratio). If the borrower agrees to pay you $150, the risk/reward ratio increases to 3:1. Investors favor risk/reward ratios in the 2:1 range when analyzing potential