Written by Sean Pollock

Monday, 16 June 2008 23:16

It takes time to build wealth and it can't just happen overnight, no matter what anyone tells you. But in order to invest successfully you also need definite investment goals and a strategy.

Are you saving for retirement or are you seeking additional income? Do you invest to save for college or are you looking to build wealth? These are a few examples of what your investment goals can be. Your investment tactics will be different depending on your answer. So ask yourself what you are truly looking to achieve by investing money before you do. If your resources allow there is nothing wrong with having two or three goals and working on them simultaneously.

When you are done with the goals you need to pick a good strategy. The strategy addresses the question how you are going to achieve your investment objective. Are you going to invest in mutual funds and CDs? Or are you going to pick stocks and bonds? And if you choose that, in what proportions are you going to combine the stocks and the bonds you select?

Your strategy should always be based on your acceptable risk level, expected return and investment horizon. The more return you want, the more risk you must be able to take. And conversely, more risky investments are supposed to offer you greater return as a reward for bearing so much risk.

Stocks, mutual funds and ETFs are known as most risky investments. Bonds, CD, and money are considered the safest investments. The approximate rule says if you are N years old, then the percentage of investments you should hold in risky instruments is 100 minus N. The remaining amount should go into the safe ones.

Here are the points your investment strategy should address

* Financial instruments or vehicles you will be using
* Proportion of each in your portfolio
* Acceptable risk level
* Investment horizon
* How often you are going to assess the performance of your portfolio
* How frequently you are ready to rebalance your assets

Perhaps the best solution to implementing an investment strategy is to trust your money to a mutual fund manager. Mutual funds are pools of money from investors, managed by investment professionals, who stay current on market developments, and are skilled in investment techniques. Many of the funds are run by large financial institutions that employ best people. Mutual funds always come with a prospectus, which contains the fund's goal and strategy. You can select those funds, whose goals and strategy matches yours.

And yes, a tribute to stock options. Stock options are not for investing. No matter what brokerage firms tell you about trading equity options and how low they drive their commissions, avoid using options for investing. Options are extremely complex instruments made by financial institutions to manage their risks. True, you can manage risks of your investments too, but that requires a lot of training to do that with options.

Summarizing the basics with which any investing should begin, it is important to establish an investment objective, and a strategy. Both the objective and the strategy have to come from different sides of your financial standing and ability, as well as your personal perception of risks. That's why we built our Personal Financial Analyzer, to suggest your best investment strategy based on your input. The way it's designed, that strategy will fit your financial profile as part of a bigger picture. It will also suggest a list of mutual funds which fit your risk profile and preferred strategy. You can start out right now and for FREE to find out where your finances stand and how to get where you want to be.