How To Make Your Investments
One: Meeting Investment Prerequisites-Before one even thinks of investing, they should make sure they have adequately provided for the necessities, like housing, food, transportation, clothing, etc. There should be an additional amount of money that could be used as emergency cash, and protection against other various risks. This protection could be through life, property, liability, and health insurance.
Two: Selecting Suitable Investments-With all the information gathered so far, a person will use it to select the investment vehicles that will compliment their goals the most. One should take into consideration expected tax, return, and risk considerations. Careful selection is important.
Three: Evaluating Investment Vehicles-Next up is evaluating investment vehicles by looking at each vehicle’s potential return and risk.
Four: Establishing Investing Goals-Once the prerequisites are taken care of, an investor will then want to establish their investing goals, which is laying out financial objectives they wish to achieve. The goals chosen will determine what types of investments they will make. The most common investing goals are accumulating retirement funds, increasing current income, saving for major expenditures, and sheltering income from taxes.
Five: Adopting an Investment Plan-Once someone has their general goals, they will need to adopt an investment plan. This will include specifying a target date for achieving a goal and the amount of tolerable risk involved.
Six: Managing the Portfolio-Once a portfolio is put together, an investor should measure the behavior in relation to expected performance, and make adjustments as needed.
Seven: Constructing a Diversified Portfolio-In order to achieve their investment goals, investors will need to pull together an investment portfolio of suitable investments. Investors should diversify their portfolio by including a number of different investment vehicles to earn higher returns and/or to be exposed to less risk as opposed to just limiting themselves to one or two investments. Investing in mutual funds can help achieve diversification and also have the benefit of it being professionally managed.
Considering Personal Taxes
Knowing current tax laws can help an investor reduce the taxes and increase the amount of after-tax dollars available for investing.
These income taxes have the greatest impact on security investments, which the returns are in the form of dividends, interest, and increases in value. Property taxes can also have a significant impact on real estate and other forms of property investment.
Types of Income-Income for individuals can be classified into three basic categories:
1. Active Income-This can be made up of wages, salaries, bonuses, tips, pension, and alimony. It is made up of income earned on the job as well as through other forms of noninvestment income.
2. Portfolio Income-This income is from earnings produced from various investments which could be made up of savings accounts, stocks, bonds, mutual funds, options, and futures, and consists of interest, dividends, and capital gains.
3. Passive Income-Income gained through real estate, limited partnerships, and other forms of tax-advantaged investments.
Investments and Taxes-Taking into tax laws is an important part of the investment process. Tax planning involves examining both current and projected earnings, and developing strategies to help minimize the level and defer of taxes. Planning for these taxes will help assist investment activities over time so that an investor can achieve maximum after-tax returns.
Employer-sponsored plans can include 401( k) plans, savings plans, and profit-sharing plans. These plans are usually voluntary and allow employees to increase the amount of money for retirement and tax advantage of tax-deferral benefits. These plans generally allow people to defer taxes on both the contributions and earnings until retirement.
Investing Over the Life Cycle
As the investors get closer to retirement, their focus is usually on the preservation of capital and income. Their investment portfolio is now usually very conservative at this point. It would typically consist of low-risk income stocks and mutual funds, high-yield government bonds, quality corporate bonds, CDs, and other short-term investment vehicles.
As investors age, their investment strategies tend to change. Younger investors usually go for growth-oriented investments that focus on capital gains as opposed to current income.
As the investors become more middle-aged, other things like educational expenses and retirement become more important. As this happens, the typical investor moves towards more higher quality securities which are low-risk growth and income stocks, high-grade bonds, preferred stocks, and mutual funds.
Investing In Different Economic Conditions
This involves matching the risk and return objectives of an investor’s plan with the investment vehicles. If there is an experienced investor that can tolerate more risk, then speculative stocks may be right for them. A novice investor that wants a decent return on their capital may decide to invest in a growth-oriented mutual fund.
How an investor responds to these market conditions will depend on the types of investment vehicles they hold. No matter what the state of the economy is, an investor’s willingness to enter the capital market depends on a basic trust in accurate and fair financial reporting.
Even though the government has different tools or strategies for moderating economic swings, investors will still endure numerous changes in the economy while investing. An investment program must allow the investor to react and recognize to changing conditions in the economy. When to make your moves, it is important to know where to put your money and.
Knowing when to invest is difficult because it deals with market timing. Even most professional money investors, managers, and economists can’t consistently predict the market and economic movements.
Stocks and the Business Cycle
When business is thriving and profits are up, stock prices react by increasing in value and returns. On the flip side, when economic activity is diminishing, the values and returns on common stocks tend to follow the same pattern.
Conditions in the economy are highly influential on common stocks and other equity-related securities. Economic conditions is also referred to as the business cycle. The business cycle mirrors the current status of a variety of economic variables which includes GDP, industrial production, personal disposable income, the unemployment rate, and more.
Bonds and Interest Rates
Step 6: Constructing a Diversified Portfolio-In order to achieve their investment goals, investors will need to pull together an investment portfolio of suitable investments. Investors should diversify their portfolio by including a number of different investment vehicles to earn higher returns and/or to be exposed to less risk as opposed to just limiting themselves to one or two investments. Planning for these taxes will help assist investment activities over time so that an investor can achieve maximum after-tax returns.
Lower interest rates are favorable for bonds for an investor. High interest rates increase the attractiveness of new bonds because they must offer high returns to attract investors.
Younger investors usually go for growth-oriented investments that focus on capital gains as opposed to current income. An investment program must allow the investor to react and recognize to changing conditions in the economy.