Investing for beginners
There are many reasons why people want to invest. Some want to invest for the sake of making money. This is the wrong motivation. Others want to secure their retirement. Then there are those who want to accumulate funds as quickly as possible for a specific purpose, such as buying a home, providing an inheritance for their families, or paying for a college education.
To allow material assets to erode because of bad management is not good stewardship. However, if you simply multiply and store assets without a purpose, you’ll be guilty of hoarding, which is condemned by Jesus in Luke 12:16-21. Investing itself is not unscriptural. Solomon, in all of his wisdom, gives an excellent investment plan to follow. “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth” (Ecclesiastes 11:2). Through Solomon’s searching he found the only way to have peace of mind in regard to investing for the future was to diversify and turn the worry over to God. However, few people are knowledgeable enough to invest wisely without some basic suggestions of what to do and how to do it.
No one should invest without having a purpose. So, formulate some investment goals—retirement, education, tax shelter, foreseeable relocation and moving expenses, and so on. Why are you investing? What will you do with the money? How much will you need to accomplish your goals? How long are you willing to wait in order to accomplish your goals? How much are you willing to risk to realize your goals? Can you invest without jeopardizing the family income? Is investing part of your family budget? (Do not allocate money for investing if your family budget does not allow for investing. Wait until the budget can sustain an investment allocation.) Can you afford to lose your initial investment if the market or your particular investment choice reverses itself and begins to drop in value? How long can you afford to wait if your investment begins to drop in value? All of these must be considered and evaluated before any money is allocated to investment.
Although there are thousands of opportunities for people to invest their money, there are a few basic investment rules that everyone should follow, whether they are seasoned investors or novices.
1. Avoid personal liability. Standing in surety is always an unwise investment strategy.
2. Evaluate risk and return. If you cannot afford to lose it, don’t invest it.
3. Never encumber all of your assets. Keep at least half of your investment debt free.
4. Be patient. Most get-rich-quick schemes rely on greed and quick decisions. Be patient, let your money work for you, and don’t expect overnight success.
5. Diversify. Follow Solomon’s words of wisdom and don’t put all your eggs in one basket.
If you are reading this article, chances are you are a beginning investor. If so, the following are suggestions that should help you make the right investment decisions.
1. The investment should be simple to understand and easy to follow.
2. It should take very little time to administrate.
3. It should not cause you stress, worry, or anxiety.
4. It must not change your lifestyle or cause family disharmony or stress.
5. You need to be able to handle the investment entirely on your own.
6. It must have liquidity (getting your money back in case of an emergency).
7. You should be able to increase your investment without administrative or managerial hardship.
8. Risk only what you can afford to lose.
The Meaning of Risk
The term risk refers to potential loss. Risks can be numerous or they can be negligible. When beginner investors are considering their investment options they need to understand the sources of risk so they can minimize the risk factors.
1. Interest rate risk. Changes in interest rates can affect bond prices and bond returns.
2. Purchasing power risk. Because inflation eats away at your purchasing power, the rate of inflation should be considered when investing.
3. Market risk. The rise and drop of the general stock market can affect your specific investment.
4. Marketability risk. The ease with which you can sell your investment.
5. Business risk. If issuers have large financial and overhead commitments, the risk of default is increased.
6. Reinvestment risk. The ability to reinvest your principal and dividend receipts at a desirable rate.
7. Price risk. This risk is based on current interest rates and the rate of inflation.
Beginning investors should first consider investing in conservative options and then expanding into more active or higher risk investments when they become more familiar with the investing process. There are four areas that beginning investors should consider.
1. Certificates of deposit (CDs). CDs guarantee a specific and stated rate of return at maturity. The longer the maturity time, the higher the rate of interest return.
2. Individual Retirement Accounts (IRAs). Contributing to an IRA as early in the year as possible can spell thousands of dollars of additional interest earned over the life of the account.
3. Low to medium risk growth mutual funds. Disciplined contributions to growth mutual funds over the years will reap huge dividends. Even if the contribution to a growth mutual fund is the minimum allowable, if it is consistently and regularly invested, it will accumulate.
4. U.S. Savings bonds. U.S. Savings bonds are safe investments with a guaranteed rate of return.
Every investor must begin somewhere. Before investors allocate money to any number of investment options, they first need to set goals, understand some basic investment rules, and realize that investing is not intended to be an overnight get-rich-quick success. Those who want to invest should know that investing is a long-term undertaking that should not affect the daily family routine and must not cause the family stress or discord.
Originally posted 3/25/2012