Family Investments 101

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Do you have a plan to make the most of your money? Family investing doesn’t have to be a big expense. Here’s how to make your family’s money work for you…

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It is a well-promoted notion that financial investments must be riddled with complicated terms in order to be profitable. In most cases, the opposite is true. Investing can be done by any family to help meet its goals.

Making a Plan

The most important concept of investing is that you need to have a plan. You cannot hit a target you have not identified. Sit down with your partner and discuss your goals and how you would like to achieve them.

Your investment plan will be just as individual as you are – it should be personalized to match your goals, risk tolerance and financial situation. For short-term goals – less than five years away – put your money in more conservative investments. You can uses the more volatile

investments with higher growth potential (such as a stock-owning mutual fund) for long-term goals. This gives you plenty of time to ride through market swings. As you approach your goal, you can decide the best time to liquidate your investment into more conservative financial vehicles. Your plan should come up with the following: a list of the goals that you want to accomplish, the time frame they need to be accomplished in and a plan detailing how to achieve your goals.

At this point, you should also assess your investment personality. Are you thrilled when riding the ups and downs of the stock market? Do you ask for “hot tips” on stocks? If you have emotional traits that influence your choice of investments, try to counteract those and act as rationally as possible. Set reasonable expectations for each investment, including a time frame, to accomplish your objectives. It is easy to panic and sell when the market drops 300 points in a day. Having a plan gives you a guideline to make your decisions rationally and not emotionally.

Risk and Reward

Determine your comfort level when balancing between risk and safety. If you will constantly worry that you might lose your money, then stay away from investments that put your principal at high risk. The trade-off for this will be a lower reward, or return, on your money, but if it helps you sleep better at night, you’re probably better off.

Remember, too, that to do nothing also presents risk – the risk of having inflation strip the value of your money away as well as losing opportunities for greater wealth. You should never put money at risk that you cannot afford to lose. Build your base with conservative investments and as you progress, work into more aggressive investments.

Selecting an Investment

There are many good investments for you to choose from – never buy into a salesperson’s pitch that only he has the “right” investment for you. Go to the library and check out books on investing. Interview a variety of financial service firms before selecting a firm to handle your investments. This takes time and effort, but it is well worth it. Never buy a financial product unless you are comfortable that you understand it completely. With that in mind, here are some generic explanations of common investments:

Bonds

An investor loans money to an entity such as a government or corporation and receives a contract – the bond – which includes the terms for repayment of principal and interest. There are a wide variety of bonds with various features – everything from conservative bonds issued by the U.S. government to very risky ones issued by speculative companies. The library should have rating information on most bonds.

Stocks

Shares of ownership, or equity, in a corporation. Some pay dividends, others do not. Stocks can range dramatically in their level of risk. The value is dependent on many factors, such as the corporation’s profitability and growth potential. Investigate thoroughly before investing.

Mutual funds

A pool of money is collected from individuals, which is used to establish a portfolio of holdings for the group. Mutual funds come in all shapes and sizes; research them carefully. Find out what securities they invest in to evaluate the risk involved, how much their administrative shares are and a record of how well the fund has performed in both “up” and “down” markets.

Remember, buying futures, derivatives “on margin” and other complicated investments should be left alone unless you completely understand the risks you are taking. They may sound flashy and exciting, but they can also leave many wounded investors along the way.


Investing Regularly

Another important factor in investing is that you do it regularly. Professionals use a term called “dollar cost averaging.” Dollar cost averaging simply means that you put a fixed amount of money away into an investment on a routine basis. When the investment is priced high, you are buying less of it. When the investment is priced low, you are buying more of it. Studies have shown that this lowers the overall cost of the investment when compared to more random strategies.

Diversify

As the saying goes, don’t put all your eggs in one basket. Many experts agree that the asset allocation and the proportion and type of each investment in your portfolio is more critical to your financial success than those particular investments you hold. Mutual funds are an excellent way for individual investors to diversify their portfolio and thus reduce their overall risk.

Monitoring Your Investments

You need to monitor your investments on a regular basis. Do not concern yourself with the ups and downs as much as the long term picture. Compare your investment returns with your expectations. Investigate any discrepancies in performance and make appropriate decisions based on your plan.

Cynthia Bohman Thompson is a mother, freelance writer and certified financial planner.


LEARNING ABOUT MONEY AND INVESTING

The Little Book That Beats the Market
By Joel Greenblatt; John Wiley & Sons; $19.95

Greenblatt, a former hedge fund manager, offers basic principles for successful stock market investing along with formulas and methods explained using sixth grade math skills.

Money Doesn’t Grow on Trees: Teaching Your Kids the Value of a Buck
By Ellie Kay; Spire; $5.99

This insightful read offers parents a wide range of tools to help them teach their kids about money. Everything from saving and budgeting to learning about credit and dealing with debt is discussed.

Raising Money Smart Kids: What They Need to Know About Money – And How to Tell Them
By Janet Bodnar; Dearborn Trade Publishing; $17.95

Bodnar, the deputy editor for Kiplinger’s Personal Finance, has a wealth of easy-to-understand concepts about teaching children about investing, along with how parents’ good and bad money habits can rub off on the kids.

The Road to Wealth: A Comprehensive Guide to Your Money
By Suze Orman; Riverhead Trade; $18

The tell-it-like-it-is financial guru presents an encyclopedic guide to financial freedom covering everything from managing debt and owning a home to making investments and preparing to pass it all along.

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