Along with savings, investing is the other valuable tool to help you increase your capital worth. You may find it intimidating, but it’s not as hard as you may think.

Choices, Choices, and More Choices

There are endless choices for investing, so as you sort through them, consider these three questions:

1. How Will the Investment Improve Your Life? 

Investment in personal assets may drastically affect this question. Investments like a principal home, vacation home, or rental property—furnishings, automobiles, clothing, jewelry, and so forth, are valuable personal assets that may be considered investments. Investing in land for agriculture to raise your own food, or investing in your own business to provide a livelihood may also affect this question.

2. How Safe is the Investment or Strategy? 

Does your investment portfolio allow for increased risk with certain investments, or do your investment goals require a more conservative approach? Do Not stray from the investment program you’ve designed. If an investment doesn’t bring you closer to your written goals, avoid it.

3. How is Your Return on the Investment?

Does this particular investment make sense in terms of your knowledge and investment experience? Does it fit your investment plans and satisfy your short- and long-term investment goals?

Current Investment Menu: 

The following list provides a menu of investment categories to consider as you identify, define, and plan out your investment goals. Be sure to make short-term and long-term goals and strategies.

• Personal Assets: Home(s), furnishings, automobiles, apparel, jewelry.
• Insurance: Life, health, disability, casualty, disaster, business, self-insurance.
• Real Estate: Raw land, farmland, rental property, commercial real estate.
• Your Own Business. Even just a side business to supplement your income.
• Someone Else’s Business: Stocks, mutual funds.
• Bonds, Notes, Loans, Annuities.
• Gold, Diamonds, Art Objects, Collectibles.

Uncertainty, Vagueness, and Risk 

As you consider the various investment opportunities listed above, one fact is obvious: The future is uncertain. A cloak of uncertainty surrounds each investment opportunity. Will the economy grow at a vigorous rate or falter in an environment of financial difficulties? Will stocks rise to new heights or fall to historical lows? Will interest rates go up or down? Will interest in collectibles and art be faddish or long lasting?

No matter how you answer these questions, there are some concrete issues: You need a home; children’s educations must be financed; retirement is an approaching reality, and taxes must be paid. These are only a few of life’s more important responsibilities moving us toward savings and investments.

Rule: Shifts in economic growth and interest rates and fluctuations in financial markets are normal parts of our nation’s business and economic cycles.

Shifts and fluctuations have happened before, and they’ll happen again. New or disruptive economic events, like sudden shifts in the financial market, often receive considerable media attention. Long-term success stories, however, seldom receive the same coverage. Don’t be fooled by spin-doctors or investment gurus. If the media is reporting it, it’s too late to take action. Both, journalists and experts report historical events not future developments.

Develop a Long-Term Investment Plan

Throughout this Series, you’ve been reminded, ‘To fail to plan… is to plan to fail.’ This same reminder applies to investment goals and strategies. Haphazard or poorly conceived investments bring frustration and financial ruin. Years of budgeting, saving, and self-sacrifice, with your personal finances can be overturned by a careless investment. To avoid such a disastrous probability, and to help your planning, follow these three steps:

1. Define your Investment Objectives

Everyone’s financial needs are different. Yours are no exception. Define your investment goals and strategies by asking yourself two questions about your needs:

a. What do you want from your investment? When young you may want investments to satisfy several goals: an education, a home, or a business of your own. If you’re older, you may be looking toward your child’s education, or retirement and its special cash flow needs. The goals you define are as varied as the financial markets available. You should clearly identify appropriate goals—for the short-term and for the long-term—so all your wants and needs are satisfied.

b. What is your time horizon? When will you need the money your investment capital earns? Will you need it within ten, twenty, or fifty years?

Take some time right now to define your Inestment objectives. Find some paper and make three columns. In the first put the need, next to that put the date needed by, and third write down what your investment objective is. For instance, column 1 might say “retirement” or “kids college fund”, the second column might say “25 years” or in the case of your kids schooling the number of years until they will need the money. In the third column write your objectives. The first might be “To retire with 60,000 a year in income and be able to travel once a year” the second “to allow my kids an in-state college tuition and on-campus boarding fees” These will be come your invesement objectives or goals. Later this list will aid you as you research how much realistically you will need to save to accomplish each goal.

2. Know Your Tolerance for Investment Risk

A basic rule applies to most profitable investments: “The greater the risk, the greater potential for reward.” If this rule doesn’t hold true, it’s probably an unprofitable investment from the outset. If the return is not in line with the risk of the investment, you should avoid it at all cost. But if you can find an investment with limited risk and great potential for reward, consider it by all means.

Two questions are important for you to ask:

a. Are you comfortable risking some of your principal for a potentially greater reward?

b. Would you rather accept a lower return in exchange for greater safety of your investment capital?

Your time horizon is a factor in deciding your investment risk limits. Generally, the longer your time horizon, the greater risk you can withstand.

Where are you?

If you’re young and continue an investment for 20 years or longer, you may be more comfortable with the higher risks associated with more aggressive investments. However, if you’re older or nearing retirement, more conservative investments may be better suited to your needs. Only you can determine what “safe” means. You need to decide, in order to have workable strategies and hopefully profitable investments, both short-term and long-term.

Your Risk Tolerance:

Find some paper and describe and outline your risk tolerance before you consider various investment opportunities:

3. Build a Portfolio to Fit Your Objectives and Risk Limits

Your investment portfolio is the mix of investments you make. No one mix of investments is ideal for everyone. You need to structure a portfolio to fit your individual needs, based on your objectives and risk tolerance. Your goals should be reflected in the way your investment dollars are spread among various types of assets.

Make your investment plans flexible enough to be modified if your investment needs change. Your portfolio can always be restructured to meet changing investment goals. Also, when building your investment portfolio, it’s necessary to plan a certain amount of money for an emergency fund for liquid cash needs.

Plan Your Investment then Invest in Your Plan

The purpose of an investment plan is to successfully maximize the return on your investment. Once you’ve defined your investment goals and plan… determined the limits of your risk tolerance… you begin to invest your capital to build a profitable investment portfolio. The following steps may help you develop a workable investment plan.

1. Own More—Risk Less

Smart investors diversify investments. You invest in different types of assets. This strategy protects you against major drops in any one investment, market, or industry. When investments are volatile, moving up and down in value, some investments lose value while others realize large gains.

For example, if you own stocks, bonds, and money market instruments, you won’t be as vulnerable to a drop in the stock market as an investor who owns only stocks. If you invest in gold, fine art, and collectibles, you won’t be as exposed to risk as you’d be if you only invested in gold.

A word of caution about mutual funds should be mentioned. Sometimes, investors believe they have enough diversity in their portfolio simply by owning hundreds of shares of a mutual fund. Usually, a mutual fund diversifies its investments as a hedge against risk. But, as an investor of a mutual fund, you may be vulnerable to the risk of fund mismanagement or excessive administrative fees.

REMEMBER: No single investment can meet all your needs through every phase of your life. It’s important to create a flexible, diversified, investment program that can be modified as you grow older or your needs change.

2. Reinvest Your Earnings. 

Depending on your time horizon for a particular investment, you may not immediately need the income it produces. Then, you can reinvest the income to earn compound interest. This can usually be done automatically through your fund manager.

For example, most mutual funds allow you to reinvest dividends or capital gain distributions automatically. When you reinvest in this way, you compound your return on investment and earn interest on your interest.

The power of compound interest was discussed in Workbook 1 and Workbook 2 and explains how you can use the Rule of 72 to double an investment. Just to remind you…the time needed to double the value of an investment is calculated by dividing 72 by the annual interest rate. For example, with an annual interest rate of 8%, the investment doubles every nine years.

3. Pay Yourself 

As you’ve already learned in the prior Workbook, it works best to pay toward your future first. Regardless of the amount you’ve committed to invest, make a habit of investing in your future first. Your consistent, focused action yields high returns.

On your journey to Financial Freedom—avoiding the temptations and detours along the way—you’ll find the most rewarding step is to write a check to your Investment Account first… even before you pay bills. You’ll be traveling the road to Financial Freedom in a souped up racecar designed to finish in a mere fraction of the time required by other poorer planned cars. Streamline the process, and have your investment or savings automatically transferred from your checking account to your investment account monthly, using automatic fund transfers or bank drafts.

Fixed and Regular

Investing a fixed amount of cash, at regular intervals, is a lot like the water left dripping on the sandstone. The strategy is called “dollar-cost averaging.” It’s a simple way to help reduce investment risk. Your dollars buy more value when the price of the investment is lower and less value when the price is higher. By investing regularly over a wide range of prices, your investment accumulates at a lower average cost per unit purchased than if you’d invested a large sum of money at one time maybe at a higher price.

Of course, dollar-cost-averaging doesn’t protect against loss in a declining market. Therefore, it’s more profitable to continue your investment for a longer time so possible changes in price will average out in your favor.

Go Long to Score Big

With investing, patience is an important virtue. Over the short term, financial markets rise and fall in response to many factors. Attempting to anticipate these market changes for quick gains is extremely risky. Most successful investors take the long-term approach when investing to reach their financial goals. The longer you hold your investment, the bigger you’ll score.

Responsible Capitalist Investment Goal Sheet 

You’ll find a helpful goal sheet on page 46 of the Access Education Systems Financial Fitness Training Series Workbook 3 which can be found online here: www.accesseducation.org/workbooks.htm. With it you can make short-term and long-term goals for your investments. It’s broken down in easy categories of: Personal Assets, Insurance, Real Estate, Your Own Business, Someone Else’s Business, Money Market, and Tangibles.

Complete your Goal Sheet with your spouse and keep it in a safe place to refer to it often. Mark on your calendar the date of your one-year plan goal, reminding you to review how you’re doing.

Your Recipe For Successful Investments

1. Make only modest investments in personal assets that don’t provide any return or capital increase.

2. Develop a solid insurance program.

3. Pick one or two areas of investment for a major return and stay within those areas during your investment lifetime.

4. Make all investments for the long term, but take a loss if the long-term situation changes.

5. Diversify your investments within your selected areas.

6. Study and work with others. Develop a sense of intuition about your chosen areas. Try to understand all the factors affecting your investments.