7 Proven TIPS for Investing SUCCESS

There’s no reason why you can’t buy mutual funds and also buy stocks on your own. And it doesn’t have to be a big deal. According to a survey, fund investors typically own just three funds and stock investors typically hold just three stocks. However, before you begin any investment program, you might want to consider taking the following steps:

Step 1: Fully fund your IRA, Keogh, 401 (k), and other plans that let you use pre-tax dollars to earn tax-deferred interest. If you’re in your twenties or thirties, this should be your absolute number-one priority. By being an “early investor,” you’ll reap the benefits of long-term, tax-deferred compounding.

It's a smart move that can pay off for you - perhaps even more than you'd think. Do early contributions really make that much of a difference? Consider this: To fund an IRA for any given year, you've got 15 months, from the beginning of each year until the tax deadline the following year. By consistently funding your IRA at the beginning of that 15-month time frame, rather than at the end, you could accumulate a lot more money.

Step 2: Resolve to stay away from any kind of investment that you don’t completely understand. If you don’t understand what you are investing in, how it works, and what the risks are, leave it alone. This includes puts and calls (options trading), short selling, warrants, limited partnerships, zero-coupon bonds, or any of the other exotica Wall Street comes up with. In particular, resolve to stay far, far away from commodities (futures in orange juice, home-heating oil, pork bellies, and the like).

Investments sold at shopping centers, over the telephone or at highly charged seminars should be either avoided or considered afterwards, when you have the time to understand what the documents say and when you can obtain advice from your licensed financial adviser.

Investing doesn’t have to be difficult or daunting. There is clear and straightforward help available from licensed advisers that you can feel comfortable and confident in.

Step 3: Figure out how much money you can afford to invest each month. Then do it! Month after month, year after year. There will always be some home improvement or car repair or other expense you can use as an excuse for skipping a month. But don’t. Be relentless.

Look over your monthly budget, and figure out how much you have left over after expenses. And by expenses, I mean things like bills, groceries and housing. Things that you need. Keep careful records for two or three months to see what your expenses are and where your money goes. Old records, receipts, bills and canceled checks will help you estimate future expenses. Then consider which expenses can be cut back and which should be increased.

Step 4: Use your initial contributions to pay off your credit cards. If you’re being charged 20 percent (or worse) a year on your balance, you can effectively “earn” that return each time you pay off a dollar of the principal. Get the cards paid down, then cancel them or lock them away and use a debit card instead.

Contact your creditors immediately if you’re having trouble making ends meet. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.

Step 5: Take the long view. The stock market may have gone up, up, and up for a decade or more, but that doesn’t mean it won’t ever go down and stay down for an extended period of time. Over the long term, a bear market of a year or more doesn’t really matter. If you’ve bought a quality stock or mutual fund, it will eventually go back up. Investments in stock are for long term gains. Buy the good stuff, hold on to it, and don’t worry about down markets.

The tax system in the U.S. is set up to benefit the long-term investor. Short-term investments are almost always taxed at a higher rate than long-term investments, and long-term investments are charged at a higher tax rate than super-long-term investments. If you manage to find great companies and hold them for the long term, you will pay the lowest rate of capital-gains tax. Of course, this is easier said than done. Many factors can change over a number of years, and there are many valid reasons why you might want to sell earlier than you anticipated.

Step 6. Diversify. The fact that the stock market always rises over time is cold comfort if all your money is tied up in stocks and you need to make a down payment on a house. You’ll have to sell stock and give up the gains you would have made when the market rebounds. That’s why it’s a good idea to keep some of your money in debt securities. When the stock market is down, the bond market is usually up. And, in any case, if you own quality bonds or bond mutual funds, your principal will be safe while it earns an acceptable rate of return.

Something can always go wrong in any one situation. Maybe something can go wrong in any two situations. It's tough to see something go wrong in 15 situations. That is the essence of diversification. SPREAD THE RISK AROUND. It makes a lot of sense. Some investors own 50 to 100 stocks. This is because they think they need that many to achieve the investment goals that they set out for themselves.

The traditional distribution of 60 percent in stocks, 30 percent in bonds, and 10 percent in cash is a good starting point. But if you’ve paid off your credit cards, you could use them as “cash” in an emergency. And in a bull market, you might want to put more into stocks and less into a savings account, money market, or other cash equivalents.

Step 7: Don’t get greedy. It’s human nature to want the highest possible return on your money. That’s why otherwise intelligent people who would never doubt, say, the law of gravity deny the existence of equally powerful and demonstrable economic laws, such as the fact that there is no exceptionally high reward without exceptionally high risk. And this assumes criminal behavior is not involved. If you’re dealing with a crook, you’re guaranteed to lose everything.

People make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line with the average annual returns of the stock market. I wish there was some risk-free way to earn 15 or 20 percent annually. I really, really do. But, alas, there isn’t. The stock market’s average return is somewhere between 9 and 10 percent, depending on how many decades you go back. The significantly more risky small company stocks have done slightly better. On average, they return annual profits of perhaps 11 to 12 percent.

In a cruel irony that has enormous implications for financial behavior, your investing brain comes equipped with a biological mechanism that is more aroused when you anticipate a profit than when you actually get one.
(Personal Finance Management Guide by Marie Claire Cooper. It's all about good reading and smart information.) http://personal-finance-management.blogspot.com/