Investing: getting started

Investing is an exciting prospect. It’s the opportunity to grow your hard-earned dollars and provide a nest egg for your future. Investing responsibly and knowledgeably can help you obtain the financial independence you desire.

People are often concerned about investing being complicated or risky, but there are some fundamentals that can help guide you in the process.

Investing for the future

One of the primary reasons people invest is to prepare for retirement. That people are living longer, and retirement costs are increasing, makes prudent investing all the more essential.

Most employers have switched from guaranteed pensions to retirement plans, such as 401(k)s, that require employees to make contributions and investment selections. By taking responsibility for your future finances now, you’ll have more control over how you live in retirement. Matching investments to your needs can help you provide the financial independence you’re seeking for your future and your family.

Understanding your finances

Before you jump right in and start investing, you should take a holistic look at your financial situation. Remember, investing is just one aspect of your overall financial plan, so it’s best to start by gaining an understanding of where you stand today.

Compare your assets and liabilities, and calculate your net worth. Examine your cash flow and understand your spending patterns. If you have credit card debt, pay it down before you start investing – each dollar that you save in interest now is a dollar you can invest in the future. Other items to check off the list before you start investing include working out a realistic budget, funding an emergency account and having sufficient insurance coverage.

Once you’re ready to invest, get in the habit of saving money to contribute. If you can automate that process, you’re likely to stay more consistent and committed. Employer-sponsored retirement plans typically allow you to enroll for payroll deductions, and other accounts may allow automatic, recurring deposits. Employer-sponsored plans often these come with free money in the form of matching contributions and tax-deferred accounts, so look to take advantage of those opportunities.

Investment tips

While no investment is guaranteed, there are a few principles that can help set you up for success.

• Focus on the long term. The financial market can be volatile but it’s important to remember that, historically, the stock market trends upward. Tracking the daily price fluctuations of your investments will put you on a rollercoaster and may even tempt you to make changes that might be detrimental to your overall strategy. As long as you’re reviewing your financial situation regularly and making adjustments to your investment strategy to reflect any changes to your goals, it’s wise to stay the course through minor variations.
• Take advantage of compound interest. With time, you’ll earn interest on the interest from your original investment. By leaving your earnings to be redeposited, you can exponentially increase your account value. Here’s an example of how it works: If you invest $1,000 at 8%, you’d expect a return of $80. But by reinvesting those earnings and assuming the same rate of return, you’ll earn $86.40 on your $1,080 investment. An investment that earns 8% per year will double in nine years if interest is reinvested. Use the rule of 72 to determine how long an investment will take to double: Divide 72 by the projected return and the result is the number of years it will take to double.
• Diversify your portfolio. In a well-diversified portfolio, when one asset loses value, there’s another that increases. The idea of asset allocation is to set up a mix of investments that aims to achieve your financial goals with your timeline in mind. Spreading your money over several asset classes and different individual investments lowers your risks and maximizes the possibility of a long-term return.
• Take emotion out of it. Avoid the urge to invest based on how you feel about an investment. You should always conduct due diligence and ensure the prospect has real potential before putting your hard-earned dollars in it.

Once you start investing, one of the biggest mistakes you can make is leaving your accounts unattended. While investing is for the long term and you shouldn’t obsess over fluctuations, you’ll want to review your progress toward goals and revisit your entire financial situation periodically. Reviewing it annually is sufficient if you’ve not experienced any major life events.

Investing does not need to be an overwhelming prospect. It should be viewed as an opportunity to grow your money and invest in your future. By understanding the basics, you’ll be able to proceed with confidence.

This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

Securities investments involve the risk of fluctuating prices, earnings, yields and dividends due to adverse or unpredictable market conditions and other factors. The Rule of 72 is hypothetical and there is no assurance that an investor’s money will double within a certain time frame.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Every investor’s situation is unique and you should consider your investment objectives, risks, and costs before making any investment. Contact your advisor regarding your particular situation before making any investment decision.

This material has been created by Raymond James for use by its financial advisors.