Principles of a Portfolio

In order to be success in investments, you must understand the basics and the principles of a portfolio. Investment portfolios can be structured for any risk level from the most conservative to the most aggressive. Understanding your risk limits is the first step to having an investment strategy that works for you and your lifestyle. After establishing your initial investment portfolio, you will need to track the investments and make adjustments when necessary to keep your strategy in line with your long term investment goals.

The best principle of a portfolio is to evaluate your investments based on facts and figures and not emotions. One of the biggest mistakes investors make is allowing their emotions to dictate when to invest and when to get out of an investment. Keep in mind that you are in the investment for the long term and the short term rises and falls won’t have such an emotional impact on your decisions.

Make specific investment decisions based on your objectives and risk tolerance. Once you determine how many years you want to be in an investment, you can then decide which platform is best for your goals. You can mix short term (0 to 2 years) with mid term (2 to 10 years) along with long term (10 years plus) investments for a well rounded portfolio that will provide you cash flow in the near term as well as allow you to ride out the volatility of the market to guarantee long term returns. The mix of your investments will be based on your financial needs and risk tolerance.

Changes to your portfolio will need to be made periodically depending on changes in your family, losing your job, major purchases, economic changes, and new investment opportunities. Don’t compare your investments to anybody else, but each individual will have different financial needs and thresholds. When you invest to make money, you are not in a competition, you are trying to make your life easier. So make choices that satisfy your specific circumstances.

Basics of Bond Investing

One of the hardest parts of learning how to invest to make money is learning the different types of investments and which ones are right for your situation.   The basics of bond investing are very easy to understand once you learn some of the basic concepts.  A bond is the flip side of stocks.  When you own stock in a company, you are a part owner in that company.  When you own a bond, you are a creditor to the corporation, government or governmental agency that issued the bond.  These types of entities will issue bonds as a way of raising money.   So basically, a bond is an IOU.

Bonds typically have a lower rate of return than stocks but the risk of owning bonds is lower than owning stocks so they are a much safer investment.  Determine the amount of risk you are willing to take with your investments and then purchase a correct mix of stocks and bonds based on your risk tolerance for your portfolio.  For example, if you are willing to accept more risk, your portfolio should have more stocks however if you don’t like risk, your portfolio should contain more bonds.

There are four basics of bond investing concepts to learn:

• Par value – this is also known as the face value or the principal value and is the amount of money the bondholder will receive once the bond has reached maturity.  For example, a bond that has a face value of $500, will be worth $500 when it matures.
• Coupon – this is the interest rate the bond will pay.  Typically, the interest does not vary during the life of the bond.
• Maturity – this refers to the length of time before the face value of the bond is returned to the bondholder.  This time period can be anywhere from one month to fifty years depending on the bond.
• Yield to maturity – this is the total amount you will receive if you hold the bond to maturity. It equals all the interest payments you will receive plus any gain or loss.

Bonds, just like stocks, can be bought and sold on the open market.  Of course, this is just the very basics of bond investing so do your due diligence before making any investment.

Ways To Invest Money

There are so many ways to invest money that you will first need to determine your investment goals, whether you want to invest short term or long term and then decide which investment strategy is going to meet your personal goals and needs.

Savings accounts have always been an easy way to invest money but they usually don’t provide much of a return on your investment.  Some other fairly safe investments are certificate of deposits or CD’s.  CD’s are a relatively safe investment that will provide you with a fixed interest rate for a specific period of time.  Typically, the longer the duration of the CD before it reaches maturity, the higher the interest rate will be that you are earning.  With a CD, you are basically loaning your money to a bank and they are paying you back the initial investment amount plus any interest that has been earned.

Bonds are another very safe way to invest money.  You will usually purchase bonds from a business or corporation.  The typical interest rates on bonds are relatively low compared to other types of investments but are fairly safe investments.

One of the best ways to invest money is through the stock market.  Historically, the stock market has an average return of approximately 11 percent annually.  You should know that the stock market can be an extremely volatile place to invest.  Remember that the greater the risk, the greater the return.  Only you can decide how much risk you are willing to take with your money.  Don’t invest in any market if it’s going to keep you awake at night worrying if you are losing your money.

Investing in stocks is basically that you are purchasing part ownership or shares in a company.  Companies will issue stocks or shares for sale to try and raise money to grow the business.  Purchasing a combination of stocks and bonds are good ways to invest money if you understand the risks of the stock market.   By diversifying your portfolio with both safe and risky types of investments might make it easier for you to sleep at night, especially when you hear that the stock market has dropped 200 points in one day.

Learning To Invest

Learning to invest can be fun and exciting if you learn the basics first.  There are so many investment options today that making the right choice can be confusing in the beginning.  Learning to invest is simply a matter of doing a lot of research so you understand the different tools and systems that are available.

The first step to learning to invest is determining why you want to invest.  Do you need to build a retirement account, save for a college fund, take that once in a lifetime trip or purchase the latest electronics equipment?  Once you’ve determined why you want to invest then you can start looking at either short term, long term or a combination of both types of investments.  You will also want to take into account how much risk you are willing to take with your investments.

Typically short term investments consist of savings accounts, certificates of deposits and bonds.  Learning to invest in short term investments is fairly easy.  These types of investments don’t normally pay a very high interest rate but they are fairly safe investments.  If you have a low threshold for risk, then these types of investments are excellent options.

Investing in long term investments such as stocks or foreign currency will typically provide you with a higher return on your money but it also has a higher investment risk.  Learning to invest in stocks or foreign currency will take time and patience.  There are a number of good programs and courses available online to teach you the basics for these types of investments.  If you are willing to take a higher risk, then these types of investments are an excellent option.

In my opinion, the biggest risk in investing is to not invest at all.

Learn To Invest Money

Learn to invest money wisely and you can create your own wealth.  There are many different types of investments, such as stocks, mutual funds, foreign currency and many more.  Depending on which investment strategy that fits your particular goals or interests learn the basics of that strategy prior to investing any money.  When selecting an investment strategy, decide why you want to invest.  Are you investing for retirement, college for your children, an exotic trip or electronic equipment for your home?  Knowing your goals will help you decide if you need a short term or long term investment.

Learn to invest money so your money can work for you instead of you working for your money.  By using the power of compounding interest, every day that you are invested is a day that your money is working for you.  Compounding interest is the concept of adding accumulated interest back to the principal and then earning additional interest on the entire amount.

The biggest mistake you can make when you learn to invest money is doing nothing.  By doing nothing and not investing at all is a guaranteed way of never having enough money or being financially independent.  Start investing now regardless of your age.  You can use the power of compounding to achieve your financial goals.

Learn to invest money that will make you the highest return.  For example, if you want to invest $2,000 into an investment that will provide you with a 10% return but you also have an outstanding $2,000 credit card debt that is charging you an annual interest rate of 18%, you are better off to pay off the credit card debt and then start investing.  If you don’t pay off your credit card debt, you will have to make an investment return that exceeds 18% in order to break even on your investment.

Another great learn to invest money tip is to take advantage of a 401(k) or other retirement savings plan that your employer provides.  Most of these types of plans have a tax advantage as well as an employer matched program.  This is free money and you should definitely participate in these programs if they are available to you.

Beginning Investing

If you are just beginning investing then there are a few basic principles of investing that you should understand.  You will need to honestly look at your current situation.  What are your expenses?  Do you have high interest rate debt?  Do you have any savings and what is the rate of return?  For beginning investing the next thing you need to look at is your financial goals.  How much money and how long do you have to achieve your goals?  What are your goals?  Then look at your risk level.  How much money do you currently have to invest?  How much are you willing to risk?  Do you have an emergency fund?

When you are beginning investing you need to find out where your money is going right now.  If you aren’t sure then try tracking your spending habits.  This will show you where your money is being spent and also identify any areas that you can cut back on and save a little money.  If you currently have high interest debt then your first priority is going to be paying off your debt before you begin to invest.  You will also want to establish an emergency fund of at least three to six months of expenses.

Once you are in a position to begin investing then look at investing for the long term.  Short term investments either don’t earn much interest or can fluctuate so much that you will never be able to predict when to get into the market and when to get out.  The best beginning investing is to get in the market and stay in for the long term.  You can always review your investments periodically and make whatever changes are necessary for your current circumstances.

If you are not confident with your overall investing strategy then talk to an investment advisor or someone you trust to help you.  The best beginning investing advice is never invest in anything you don’t understand.