To learn to invest informed and learn how to invest with confidence most people should break the subject down into two parts: investment basics and investing. By tackling topics or articles in the following order you can learn how to invest money as an informed investor without wasting too much time and effort.
First get a handle on basic financial concepts, terms and investment basics. Every investment in the world can be evaluated based on just a few simple characteristics. Don’t invest money in anything until you know if it fits YOUR needs for such things as safety, liquidity, growth, and income. Only if you invest informed can you avoid the costly mistakes that are caused by picking an investment that’s not right for you.
Then, as a basic investment guide, focus on stocks and bonds because this is where you are most likely to invest money in the future. Once you have a handle on these securities, its time to get familiar with investment markets and how to invest in them. If you don’t understand the stock market, for example, your knowledge of stocks (equities) is of little value in the real world of investing.
Learning all about mutual funds should be your next step and shouldn’t be difficult now that you know stocks and bonds. After all, these securities are where most mutual funds invest money for their investors. And mutual funds are where most investors invest money in stocks and bonds in 401k plans, IRAs and other accounts. There are thousands of funds to choose from but 99% of them fall into 1 of 4 general categories.
You should also get familiar with other investments like money market securities and annuities before you move from the INVESTMENT GUIDE phase of your education to the INVESTING GUIDE segment. In other words, before you can learn to invest informed you’ll need a clear understanding of all of your major investment options and how they compare in terms of their basic investment characteristics. This is not as difficult as it sounds since the universe of investments can be condensed into only 4 different categories or asset classes: cash equivalents (safe, liquid investments), bonds, stocks, and alternative investments.
Investing is the art of putting an investment strategy together and managing your money at a level of risk that’s within your comfort level. Once you understand the investment end of things you need a game plan in the form of a complete investment strategy. Asset allocation is the single most important part of any strategy; and your portfolio asset allocation over time will be the main thing that determines your success or failure as an investor. Concentrate on learning asset allocation: how to invest money (in what proportion) across the 4 asset classes mentioned above.
Now you’ll also want to learn to apply various investing strategies or tools to help offset risk while earning higher than average investment returns. The two important things to understand when you get started in the learning process are the following. Learning how to invest is easier than you think if you take the subject one step at a time in a logical sequence. Second, learning to invest informed is actually a two step process: learn investment basics, and then learn investing.
Don’t get discouraged if you don’t understand something in an investing article you are reading. Back up and search for another article that covers the topic or area that confused you. For example, if you are confused by an article on bond funds it’s probably because you don’t understand bonds in general. Most people don’t. Most people don’t get much out of an adventure novel, either, if they start reading on page 47.
Take fear and anxiety out of investing. Learn to invest informed.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.