All this government spending and our faltering economy has everyone thinking about money lately. Most people realize the irresponsible spending going on in Washington right now. From tea parties springing up across the nation to songs being written such as this one sent to me yesterday.
Now money is not everything, but it is necessary these days to make it in the world unless you are lucky enough to be on some tropical deserted island somewhere. One lesson I would say we can all take away from our government is how not to run your own personal budget. It’s pretty simple really. Work hard, live within your means, and put a little a way each month for tough times and/or retirement.
The stock market is still a good place to invest your money. A lot of people are fearful of the market, either because of the times or because they really do not understand it. It is really not as hard as you think. I will very quickly break down what is out there to invest in and how a basic portfolio should look. For this case I will just look at a portfolio with mutual funds.
First of all for the very basics. A mutual fund is simply a fund of money managed by a team of people. Their investing strategy will determine what kind of stocks they buy and sell. There are many types of funds that specialize in different types of companies. Here are a few.
Large Cap – Larger companies
Mid Cap – Mid size companies
Small Cap – Smaller companies
International – Foreign companies
Bond Funds – Either corporate or government bonds
Specialty – Things such as REITs (real estate trusts), Precious Metals, Utilities…etc.
To make things even easier, there are index funds representing these different types of funds. They are not actively managed, but simply replicate the market. Since a lot of funds do not beat the market anyways, this is not a bad option.
All that is left after this is determining the right mix of these different types of funds. There are two major considerations to make. How much risk can you handle and how long until you plan to retire. Here is an example of a younger person’s asset allocation.
50% Large Cap
30% Small Cap
10% International
10% Specialty
My allocation is similar to this except that I do have some mid-cap and also a corporate bond fund. But keep in mind that this allocation comes from someone who used to day trade and swing trade for fun so my risk tolerance is fairly high. To decrease your risk you could put less money into small caps and add a government bond fund. Your returns will be lower, but you reduce your risk significantly and will weather times like these better.
I am no financial advisor, but these are some basics if you want to go at it on your own. If the market still scares you to all ends, then you could always get a licensed financial planner to help you come up with something that will work for you. But it is important that you save for the future; however you choose to do it.
{ 7 comments }
OMG!!!
I can’t believe you are encouraging people to buy equities. Isn’t 40% loss enough? Look for another 40% by year end. Cash & precious metals are the only asset classes to even be considering in these uncertain times. Look at the charts, my gosh, are you prepared to write an apology?
An apology…come on Greg. A lot of my stuff is down quite a bit but some of it is up quite a bit. Quit trying to use the fear tactic that you accuse everyone else of using. Now is not necessarily a great time to buy precious metals because of the price. Of course people such as yourself will push this because you own lots of Gold and want the price to continue up. Now is an excellent time to buy quality companies that have been beaten down just because of the down market.
What you are proposing is what happens a lot with uninformed stock market investors. The market dives, people get scared, they sell off at the wrong time, and then buy into something that is more expensive. The cycle then repeats with their new investment. It is a well documented psychological aspect of investing.
Out of curiosity what charts are you referring to? Technical analysis is mostly used for short term trading. I haven’t been looking at too many charts lately, but I know they would show the market oversold at this point. Even looking at something like a 200 day ma I am sure would show this. But at the same time, considering the uncertainty in the market, i wouldn’t say that this indicates any kind of bottom. The market could certainly drop more or it could rebound. Not even the best investors will try to time the market. For younger investors it is a good idea to dollar cost average into equities. Just like when you are older it is better move your investments into more conservative entities.
Like I said in my post, it is all about your risk tolerance and what you feel more comfortable with. You obviously have a very low risk tolerance so sticking strictly to precious metals and bonds is probably best for you, but that isn’t whats necessarily best for everyone.
unbelievable!
What exactly is unbelievable? Just like rising stock prices is no reason to buy, dropping prices is no reason to sell. Its all based upon multiple factors to include valuation, company fundamentals, and the decisions of those in charge of the company. Although I was not talking about individual stocks in the post, the same methods are used by mutual fund managers.
If you want to argue your point that everyone should stay out of the market for now, you could use an argument that Obama’s anti capitalist policies will do longer term damage to the market causing a slower recovery. But as a younger investor, this does not pose as much risk to me as it would to you. Then again, a person very close to retirement would not be affected quite as much if their asset allocation was correct.
No Apology necessary. If you are in the market for the long run, when prices fall your stock shares rise. Eventually things equalize. Or that’s how it usually works.
And they would have bounced back if Barack Obama hadn’t kept opening his big mouth, talking down the economy. He is scaring Wall St with his socialist ideologies. Now that most American workers see the [mis]direction Obama is leading the USA, and know he’s going to take what they have and re-distribute it to others, the fear that is out there is causing some of the problems.
You definitely don’t need to apologize. (Especially since you put a disclaimer saying you are not a professional.) I don’t see anything wrong with posting some things that have worked for you to try to help others. I think it’s helpful that you explained things in a simple way. For people like me it can get intimidating. Good advice.
one has to wonder how many people are kicking them selves for not taking this advice
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