Below are Essence Magazine's five ways to invest wisely.
All of us start with the same level of financial knowledge—that is to say, with none,” says Eric Tyson, financial counselor, columnist and author of Investing for Dummies (Wiley). What’s important is to be an informed investor and to protect your investments from as much unnecessary risk as possible. A lot of erroneous information about finances exists, Tyson says. But by following these principles and strategies, you can join the ranks of successful investors.
1. Do your homework. “People flounder into lousy investments because they don’t understand how something works,” Tyson says. Check your local library for books on investing, or visit such informative Web sites as smartmoney.com, fool.com, and CNNmoney.com. Study the basics until you are knowledgeable about investment types and terms. Seek out what works best for your financial goals.
2. Spread out your money. Investing can be full of uncertainty: Stock prices fluctuate daily. By allocating your money to diverse investments, you can help buffer the risk. For example, if all your funds are tied to your employer’s company stock and your company faces scandal or bankruptcy, your stock will suffer. Tyson advises placing your investment money in companies of various sizes, international markets and different industries to minimize the risk.
3. Make your own choices. Once you understand the basics and match what you learned to your financial goals, then decide if you need a financial adviser. She can help guide you, but you should make and monitor your own choices. “The more you learn, the more confident you get with making decisions on your own,” Tyson explains.
As you interview potential advisers, be sure to ask how they make their money. Advisers may get commissions by pushing certain products to clients or may get paid for referrals. Ask if he works on a commission or fee basis or if he is affiliated with a mutual fund or a bank. Check advisers’ credentials at cfp.net (Certified Financial Planner) or napfa.org (National Association of Personal Financial Advisors).
4. Watch for fees. Mutual funds and stocks have ongoing operating expenses, which are charged as an annual fee (typically a percentage of your investment). Know which fee amounts are considered high or excessive for your investment type, and beware of those that charge commissions. For more conservative funds, annual fees should be less than 0.5 percent. For actively managed mutual funds, annual fees over 1 percent for domestic and 11⁄4 percent for foreign are considered excessive. You’ll make little profit on returns if you’re paying a boatload of fees.
5. Pick and stick. Between TV analysts giving stock market updates almost every five minutes and doomsday headlines, investment news can send you into a frenzy. It’s easy “to get caught up in the noise,” Tyson cautions, “but it’s important to keep a level head.” Select your products and then step back.
TIP: Look for Tax-Free Products
Some funds charge additional taxes and commissions should you decide to make a change or bail out of your investment choices altogether. If you trade or change your funds or stocks within 12 months, you could be taxed at a higher rate and have to pay tax on any amount gained from the sale of your investments. In addition, you’ll typically have to pay taxes on any interest you earn. So look for tax-free or tax-friendly stocks, funds and bonds.
Excerpted from Essence Magazine.
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