5 Ways to Become a Better Investor

Matt Bell, a friend and financial author has written an excellent article called The Essentials of Investing on his blog, Matt About Money.  It is a very helpful, basic guide for those who need to know how and where to get started.

Matt says that to lower the fear and confusion follow five simple recommendations:

First, Get in the Game. Allow money to multiple for you. A long-term investment strategy allows us to earn compound interest. In essence, compound interest is interest earning interest.

Once you’re out of debt other than a reasonable mortgage and have an adequate emergency fund, you’re ready to get compound interest working for you.

Second, Estimate How Much You Need to Invest. Of the various online retirement calculators you could use, one of the easiest is Fidelity’s myPlan Snapshot. Then click “Create a Plan” to run a more detailed analysis.

Third, Determine Your Optimal Asset Allocation. It’s important to understand, and more than a little counter-intuitive, that how you invest is more important than what you invest in. Diversification is the key.

Finally, Determine How You Will Choose Your Investments. Once you’ve determined how much to invest each month and have figured out the right asset allocation for you, there are a number of ways you could choose what to invest in, including: choosing your own mutual or exchange-traded funds within the various asset classes and in the right percentages based on your chosen asset allocation, putting your money in a target-date mutual fund, subscribing to professional investing newsletters, or working with a professional investment advisor. It is best to start small and learn as you gain knowledge and experience.