Your Voice of Financial Reason

Principles of Smart Investing

Tuesday, February 7, 2012

Your journey to financial well-being can seem daunting.  However, you can steady your course by adhering to the following principles of smart investing:  

Pay Yourself First

One of the best techniques to help you invest in your future is the "pay yourself first" method.  That means that with every paycheck, a predetermined amount is automatically transferred to your savings and investments.

Leverage Compound Interest

Compound interest is growth through multiplication.  Earnings put back into an investment on a regular basis will increase the size of the asset and its ability to generate more earnings in the future.

Avoid Market Timing

Market timing is rarely a successful investment strategy because it involves outguessing market movements.  Essentially it means buying before the market goes up and selling before the market goes down.

Practice Dollar Cost Averaging

Dollar cost averaging refers to the method of investing a fixed amount of money at regular intervals.  Sometimes you will be buying when prices are high and sometimes you will be buying when prices are low.  Over the long-term, your average cost will be lower and your return higher than if you tried to predict market swings.

Minimize Risk and Maximize Reward

Different investment vehicles carry different levels of risk.  A strategy for managing risk and boosting returns is to diversify across industry and investment types. 

Asset allocation is an important component of diversification.  It involves deciding what percent of your total investment portfolio should be allocated into each of the investment categories.

Maximize Your Tax Favored Retirement Plans

Your best investment "bargains" are retirement plans that provide tax deferral or tax deductible features.  Tax deferral means that taxes are not paid on investment earnings until withdrawal of the funds.  Tax deductible means that contributions made to a tax favored retirement plan are excluded from your reported income.

Seek Competent Advice

Each investment has its own set of advantages and dis-advantages.  Therefore, it is important to work with a trusted financial advisor who understands the pros and cons of each, and will guide you in selecting the investment vehicles that most closely fit your circumstances and support your life goals. 

©2012 Money Quotient, Inc. All Rights Reserved.

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