Learning To Invest
A while back I talked about investing tips that we learned in our Financial Peace University class. Among the key things we learned was that you should be out of debt before investing (except mortgage), you NEED to diversify your holdings or risk losing it all, and only work with financial advisers with the heart of a teacher.
He also talked about his preferred method of investing – mutual funds. He believes that long term they hold the most value for the average consumer. There are a ton of other options out there, but they all have drawbacks and catches. Sticking with mutual funds is probably your best bet.
Before you even decide what mutual funds you want to invest in, you need to decide where you'll be buying those shares. Ramsey suggests that people invest up until the maximum of their company match in a 401k, then switch to funding a Roth IRA. Once the Roth IRA is maxed out, switch back to the 401k all the way to the maximum. If you can, you should try to do this for 15% (or more) of your income.
I like Ramsey's plan, and it certainly makes it easier for me as an investor to just go along with his plan as it has been tried and true for many, many people.
So what kind of funds should you buy in your Roth IRA or 401k?
Deciding what type of investments to choose within your Investment vehicle of choice can be a daunting task. There are international funds, small company funds, large company funds, etc etc. For a new investor it can be enough to make you throw up your hands and give up. I know I have been close to that point at different times in the past few months. Ramsey makes it a bit simpler for us and suggests that you follow this rule of thumb – 25% of your allocation should go to each of these categories:
- Growth and Income Funds
- Growth Funds
- International Funds
- Aggressive Growth Funds
Choosing such an allocation helps you to be diversified across a broad category of company types, and should help to keep your investment portfolio going up.
Are you obsessed with checking your balance like me? Just set it and forget it.
I know that one problem I've run into since starting to invest is that I constantly have to resist the urge to check my 401k balance, to see what funds have gone up, which have gone down, and then try to outguess the market by re-balancing the amounts. When the balances go up, it can be fun. But when the number in that account goes down as it has this past year, it can be quite scary.
I've found that the best thing that I can do is just make my investing automatic. I pay myself first, and then I only check my 401k every few months, instead of every day. I need to remember that investing is for the long term, and as long as I stick with it, and keep putting money in, I'll be fine.
What is your investment strategy? Do you have a hard time not keeping a super close eye on your investments – and are you able to set it and forget it?