For years now, the financial markets have been skittish, with crisis situations erupting onto the scene one after the other. Now more than ever, it's important for you to build your money-management skills, so that you can defend your hard-earned money against the many threats assailing your finances.
Whether you're an absolute beginner or a seasoned investor, you still have room to grow your investing skills. That's the rationale behind the five tips below, each of which will take you another step down the investing path toward becoming an expert.
1. Get it out of the bank
Unfortunately, when many people think about saving, their first thought is to put money into a savings account. According to the Federal Reserve, more than $6.8 trillion is sitting in savings accounts, short-term CDs, and money market funds.
Obviously, some of that money belongs right where it is. Using savings accounts and related vehicles to hold money for immediate expenses, as well as major goals coming up within the next year or so, makes a lot of sense.
But it's too easy to let short-term savings become a long-term habit. Especially with savings accounts paying 1% or less in interest -- they aren't a viable way for most people to reach their financial goals.
The easiest way to get started investing is with mutual funds and ETFs. Start with a broad-based fund that covers a wide swath of the financial markets. For instance, a logical place for a middle-aged investor with a beginner's limited tolerance for risk would be to put half your money in SPDR Trust
2. Like a sector? Pick it up
Once you've gotten your investing bearings, you'll find that you like some stocks better than others. If you expect another economic downturn, for example, then investing in cyclical stocks like Caterpillar, which can endure drops in revenue and profits, isn't as attractive as defensive stocks such as General Mills, which enjoys constant demand for its products.
Still, if you're not comfortable picking stocks, then sector ETFs are a good way to invest in those ideas. The Consumer Staples Select Sector SPDR ETF
3. Go ahead, buy a stock.
As useful as ETFs are, there's no substitute for picking individual stocks. Every industry has a leader, and you'll maximize profits investing in that stock, rather than simply buying the entire industry.
If you've never bought a stock before, start with something simple. PepsiCo
4. Find a company you've never heard of.
Companies you know well are easy investments, but they aren't always the best ones. You'll earn better returns by discovering stocks that few others know about yet.
The obvious place to find unknown stocks is among small companies. One way to search for potential winners is using what we call the OATS framework: companies whose managers (1) Own shares, (2) Allocate capital adeptly, (3) have long Tenure with the company, and (4) are Stewards of shareholder capital. Chinese stocks China Green Agriculture
5. Put it all together.
Once you have a great mix of investments, you need to know where to put them. If you're saving for retirement, IRAs and 401(k) plans can give you great tax advantages. For college savings, 529 plans and Coverdell ESAs give you some of the same benefits. Often, where you invest makes a bigger difference than what you invest in, so you'll want to make sure you build the right structure for your finances.
If you've made it this far, then you're well on your way toward becoming an expert investor. Even though there's more to learn, you're well ahead of most people and can expect to earn the rewards that financial savvy brings to investors. Good luck!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.