Investing Basics: Put Your Money to Work

After you’ve established how much risk you can tolerate, you will need to find a vehicle to invest it through.  Transaction costs and management fees are the kryptonite of investments.  They dramatically eat into profits, especially with smaller dollar value investments.  Finding a broker with low transaction fees is essential.

Invest at regular intervals

Since you will likely not time the market (few truly can), a good way to hedge yourself against risk is to dollar cost average. This is essentially taking the amount you want to invest and investing it at a regular frequency over some time horizon (e.g. once a month every second Tuesday). There are many websites and tools such as sharebuilder.com which let you do this. With this strategy, you will be buying during the market’s ups and downs which, over time, will help hedge the risk of only buying on big up days.

Where to start

For first time investors, a great way to get started investing is to look at mutual funds. Mutual funds are pools of funds linked to stocks, bonds, and other investment types. You can use these to invest in the markets, but be sure to balance your risk by allocating your money among different investments as needed. The longer you can invest you money, or the higher your tolerance for risk, the more you want to be invested in stocks.

Managers who offer these funds make money by taking a certain percentage of your funds as an annual fee. Obviously, the lower the fee you pay the better, but you don’t want to sacrifice quality just for a lower sticker price. It is also best to avoid funds which come with purchasing or transaction fees. They are generally very small, but they will quickly eat into your earnings.

Simon and I use Vanguard for most of our personal investing. They are owned by their investors, so they offer very low fees, with very competitive fund offerings. A great fund to start with is the Vanguard STAR Fund because it has minimum investment of only $1,000 while many of their other fund options start at $3,000. It has a competitive management fee of 0.34% as well. Some quick Google searching and basic research can turn up other great fund options in which to invest.

Past performance does not indicate future success

Remember, just because a fund has done well in the last few years, does not mean it will continue to have the same returns. The stock market has seen a remarkable rise since the crash in 2008-2009, and many believe that a correction will occur the coming months. In the end, always know your risk tolerance and always keep your emergency fund in a safe place like an insured savings account. In our next post, we will discuss more about investment diversification and investing in safe assets for smaller, but more consistent returns.

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