Are you ready to make money in the stock market? Investing
is an important step towards building your personal wealth,
and there are many things to consider before you begin.
Your present financial situation
You need to begin by evaluating your current financial
situation. Consider your assets, your liabilities, your
total household income and the amount of discretionary
income that you have available to invest on a monthly
basis. Your discretionary income is the income that you
have left over each month after you pay all of your
household expenses. Next, you need to evaluate your current
level of cash reserves. Cash reserves can be defined as the
assets set aside in the case of an emergency or for an
opportunity. An example of an opportunity would be a great
investment, a real estate property that you want to buy or
a great vacation discount that you want to take advantage
of. It is recommended that you keep between 3-6 months of
your total household expenses set aside as cash reserves.
The other factor to consider is the level of your personal
protection. Your most important asset is your ability to
earn an income. Protecting yourself, your home, your
vehicles and your family is important. Evaluate your levels
of insurance coverage to determine whether it is sufficient
to cover your present needs.
What are you saving toward?
Everybody saves for a purpose. Some people save to ensure a
better retirement. Some people are saving to buy a car,
home or a new boat. Some are saving to ensure that their
children have a great college education. Before you begin
to save, sit down and think about all of your goals, and
then prioritize them based on personal importance. Ask
yourself whether these goals pass the acid test. The acid
test asks if you would be willing to do whatever it takes
to achieve these goals. For example- Would you reduce your
lifestyle and expenses to save more money if it would
ensure that you reached your goal? If a goal does not pass
the acid test then you should remove it from your list.
Next, define each goal with a time frame and an amount. For
example- I need to have $50,000 saved for my oldest son by
2010 to pay for his education, is a clearly stated goal.
Once you have defined your goals, determine the dollar
amount needed to save to achieve them and the length of
time you have to save for them. These factors will be taken
into consideration when making your individual investment
selections.
Do you understand your investment options?
Consider investing into mutual funds if you are a new
investor into the stock market. Mutual funds are comprised
of multiple individual stocks or bonds and usually offer a
smaller initial investment amount to be contributed on a
monthly basis. This smaller dollar amount makes it possible
for a variety of investors to begin saving into the stock
market without large sums of cash already set aside.
Understanding stocks, bonds, mutual funds, real estate
investment trusts, cash value life insurance, annuities and
trusts is an important place to start when you are a
beginning to invest. Research each investment option to
determine which combination will best assist you in
reaching your financial goals.
Define your Investment Risk Tolerance
Now that you have an understanding of the stock market, you
need to determine your personal risk tolerance before you
start to invest. Your risk tolerance refers to the amount
of variance you are comfortable with in your portfolio, and
is often defined by how far away the goals that you are
savings towards are. Investors are typically categorized as
Aggressive, Moderately Aggressive, Moderately Conservative
and Conservative. Each investor type is characterized by
their investment portfolio, their time frame to save, their
expected portfolio returns and their overall tolerance to
withstand portfolio value changes on an annual basis.
These are the most important things to consider before you
invest into the stock market. Having a financial plan that
you implement will increase your chances for financial
success.
This is not investment advice. Before implementing any
investment strategies, consult your financial advisor or
financial professional.
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