Investing Baby Steps #2: Different Investing Strategies For Beginners Part 1
According to your investor profile, you might want to take a different route for investing. Forget what your neighbour or your brother-in-law told you about “the next big thing”. If they were that good, they would be calling you from their yacht in the Bahamas to give your stock tips”¦ not over the fence while pushing their lawnmower ;-)
In my last post about investing baby steps, I was talking about finding your investor profile. I think this step is omniimportant if you want to succeed as an investor. And succeeding doesn’t mean making millions, it does mean building a solid investment strategy that you will be able to follow that allows you to sleep well at night ;-).
When I started to write this series, it was actually meant to be one post about a general way to approach your investment strategy. While writing it, I realized the quantity of information to consider prior to the start of your investment journey. That said, I will keep writing for this series and I won’t put all the posts in a row (imagine how boring this would be if you are already set?). So today, I am explaining investment strategies starting with beginners up to more experienced investors (in part 2).
The bulldozer (100% fixed income):
Steady as a rock, the bulldozer doesn’t go fast but it will get to destination regardless if the road is slippery or not. This is often the first type of investment you make as a beginner. If you look at 100% fixed income, you are probably withdrawing money from your investment account for retirement or planning a withdrawal though the home buyers’ or lifelong learning plan for the near future. One thing is for sure, you do not want to risk this money regardless of the upside potential.
- Your first option is definitely looking toward high interest savings accounts (such as SmartyPig giving 2.01%). This money is available at any time and insured up to $250,000.
- Another great idea would be short term certificates of deposit if you plan on making a purchase even a bond or CD ladder if you are about to retire or there already.
- Money market funds are another investment possibility. However you will need quite an amount (more than 100K) if you are looking for decent yields. As interest rates are at historically low levels, you are probably better off with online high interest savings accounts instead of money market funds.
The trailer truck (80%-70% fixed income / 20%-30% equity)
Strong and steady, the tractor trailer can go long distances and go faster than the bulldozer. I like this asset allocation for investing beginners since most of your portfolio is secure, but you initiate yourself to the stock market. Therefore, you may experience market fluctuations without risking too much.
- There are already prepackaged mutual funds with bonds and stocks invested according to this allocation. This is a great start to begin your investing adventure as you don’t have to manage the portfolio yourself. However, those packaged investing solutions cost more in the form of higher management fees.
- Another solution would be to split your fixed income portion via a bond ladder and buy balanced funds (more aggressive funds) or Exchange Traded Funds (ETFs are for more experienced investors). Therefore, you would save on fees (bond and CD ladders don’t cost a thing to manage) and you will only pay management fees to a portfolio manager to trade the small stock portion. However, you must follow-up on the portfolio and rebalance it every six months to make sure you keep the same asset allocation.
So that’s it for today, next Thursday, we will explore investment suggestions for 3 other types of investors. The best stuff is yet to come !
- Investing Baby Steps #1: Know Who You Are
- Investment Strategies With $10,000 or less #3: Preauthorized Investing Setup
- Investment Strategies With $10,000 or less #2: Index Mutual Funds
- Dave Ramsey Baby Steps Step 1: $1000 Emergency Fund
- 5 steps to follow to make sure you do not lose everything to the next Bernie Madoff