Financial investing 101

Are you ready to invest, but aren't sure how? You’re not alone. The world of investing for beginners can be an intimidating place. Before you start financial investing, take an inventory of your current financial situation. It'll be helpful to plan and allocate money when you know how your debt plan and emergency funds are coming along.

What to know before you start investing

Before you jump into investing, get a clear understanding of where your money is currently going.

Build an emergency fund

The goal for an emergency fund is to save enough money to cover your expenses for six to nine months. With this in place, you are prepared in the event you lose a job or come face-to-face with unexpected costs from home or car repairs or medical emergencies.

Make building an emergency fund a priority. It's a smart way to ease stress or concerns over some of life's unknown events. This is like insurance for your budget.

Understand and manage your debt

Classifying your existing debts is a good start. Most people have unproductive and productive debts.

Unproductive debt is debt that doesn’t add to your income. It’s not for investment and it is typically used to purchase items that depreciate in value over time. It’s best to keep unproductive debt low. Examples of this type of debt include:

• Televisions
• Cars
• Furniture
• Other lifestyle items

Productive debt, on the other hand, generates income. It works to help you build wealth by purchasing assets which typically appreciate in value and sometimes produce income that pays both the principal and interest on a loan. Examples of productive debt include:

• Land
• Rental properties
• Gold
• Fine art

Pay down high interest debt

If your money is going toward excessive credit card debt or private loans, make a plan to figure out how and when you might pay those down. In the meantime, make smart decisions about how to keep financial investment opportunities in balance.

You don't have to have a full emergency fund and be debt free before you start investing. It just helps to know where your money is going and to have a well thought out plan for investing.

Know when to start investing

It takes money to make money. It’s never too late to start. And the sooner, the better. Starting early gives your money a chance to grow over a longer period of time. Start small, then adjust over time. Riskier investments are more volatile, but that also means they could deliver you greater rewards. Safer investments are often more stable, and don't often offer as much reward as higher-risk investments. Figure out the level of investment risk you are comfortable with. And keep in mind, it’s all about aligning your investments with your goals.

First things first

First and foremost - get your financial house in order. Make sure your goals and aspirations are identified, plans are written down and your budget is rolling before you jump into investing. With other budgeting in place, investing could add to your plan without disrupting what you already have working for you.

Maximize your returns

When you start investing early, you give your money the chance to grow with the help of compounding. Also, creating a longer time horizon for your investments makes it easier for you to weather the ups and downs of the market.

Get comfortable before you go for it all

Test the investing waters before you jump in. Start with a small amount of money and observe what happens. After you get a sense of the market, add more and more based on what you're comfortable with.

What is a time horizon?

Your time horizon is the amount of time you have for investing. Do you need your money in 3, 10 or 30 years? Your answer will likely influence whether you want to be conservative, moderate or aggressive with your investments.

Short-term goals: If you need an option that could maintain your money with little growth in the short term, and possibly help protect your money, consider a conservative approach.

Long-term goals: If you have time on your side and are willing to try to make money with some degree of risk, go with a moderate or aggressive profile instead of a conservative one. With long-term goals, you may invest more aggressively because you'll have more time to recoup any potential losses and grow your money for when the time is right.

What is investment risk vs. reward?

Not all investments are the same. Higher-risk investments typically offer the possibility of larger rewards. Less risky investments are generally more stable and less likely to bring a larger reward.

A great way to gauge how you should invest is to figure out your investment risk tolerance - how much risk are you willing to take? Everyone's risk tolerance is different. One factor to consider is time. If you are looking for a short term return on your investment, you might consider less risky investments. When you have more time to wait on the results of what you have invested, you might carefully consider more risky investments.

When it comes to investments and risk, what will work for one person might not work for the next. However you decide to invest, compare investment risks by doing diligent research on your options before actually investing. For more information about investing and risk, you can visit the U.S. Securities and Exchange Commission website.

Figuring out your investing risk tolerance

Risk tolerance profiles

There are three risk tolerance profiles to know: conservative, moderate and aggressive. Let’s take a look at each profile.

• Conservative – If you need an option that could maintain your money with little growth in the short term, consider a conservative approach.
• Moderate – If you have time on your side and are willing to try to make money with some degree of risk, consider a moderate approach.
• Aggressive – If you are comfortable with investments and realize the possibility of making more will typically mean risking more, then you could be ready for the aggressive approach.

Key factors to consider

• Risk vs. reward – How much risk are you willing to take, what do you expect to gain and how do you balance risk and reward?
• Risk tolerance – What is the amount of volatility and uncertainty you are willing to accept from an investment in seeking your financial goals?
• Time horizon – What is the length of time you have before needing to use the money you have invested?

What types of investments are there?

Diversification is a great way to balance the risks in your investment portfolio. Diversify your holdings in each asset class and across different industries to help mitigate your investment risks. Cash equivalents, bonds and stocks are the most common investment types. Let’s take a look at the different types.

Cash equivalents are short-term government bonds with maturities of less than 90 days. Here are some examples of cash equivalents:

• Commercial paper
• Marketable securities
• Money market funds
• Short-term government bonds

Bonds are basically loans you make to another entity. These typically offer a medium risk and reward. Bonds are usually loans to either corporations, municipalities or the government. There are several options when it comes to bonds, here are a few to consider:

• Corporate – Corporate bonds are issued by public and private corporations.
• High-yield – These bonds carry a higher risk with the possibility of a higher reward.
• Municipal – Securities issued by cities, states, countries and other government entities.

Stocks offer you partial ownership in a company. If you’re planning to invest over a longer period of time, stocks are an option to consider. There are two main kinds of stocks: common and preferred.

• Common – This type of stock allows owners to vote during shareholder meetings and receive dividend payouts.
• Preferred – Stockholders typically don’t have the voting rights but they do receive dividend payouts before common stockholders do. They also have priority over common stockholders should the company go bankrupt and liquidate its assets.

Mutual funds are when your money is pooled with other investors with a similar goal so you have greater buying power than you would on your own.

Exchange-traded funds (ETFs) are similar to mutual funds where they represent diverse investments, but ETFs are bought and sold throughout the day. They may be less expensive since they are not actively managed like a mutual fund, but brokerage commissions may occur when you buy or sell.

Keeping your investments diversified

Diversification is a strategy where you spread the money you’re investing across different types of investments. Think of it as not putting all your eggs in one basket. If you're looking to balance or mitigate the risk levels in your investments, diversification is your best option. Portfolios take time to build, so don’t be in a rush.

Building your portfolio

“Portfolio” is a term for where all your investments are held for you to review, manage and adjust. Portfolios include a mix of all your investments. To help you build, modify and maintain your portfolio, stay in line with your risk tolerance, what you're experiencing in the market and the help of a professional.

Developing investment patience is one key factor to building your investment and retirement portfolios. Your portfolio will take time to develop and mature. Keep a long-term perspective in mind (especially for retirement) and monitor your investments. Over time, you'll need to make the appropriate adjustments to align with your objectives.

If you experience a major life change, you should reassess your investments and make changes to adapt your strategy to your new situation.

Something to consider as you’re building a portfolio is to educate yourself about the investments that are available in the market, and the level of risk each of them hold. You can then choose different types of investments depending on your needs.