Managing your financial life is not just about money.

Investing 101 – Pt.12 Stuff You Need to Know

This is the 12th article in a series that will discuss and explain basic investment concepts in hopefully an understandable and meaningful way. Whether you work with an investment advisor or choose to do your own investing, there are some things you need to know to be successful. Here is my take on what those things are.

All the articles in this series so far have discussed stocks and bonds and the advantages and disadvantages of these investments, along with some history and some perspective. This article, and the ones that follow, will discuss how to be a successful investor, and how to put those stocks and bonds to work for you.

Before you make an investment of any kind, you have some questions to answer before doing so.

What is my goal for this money that I am about to invest? You need a clear purpose in mind. Is it for your retirement? Will it be used to pay for college costs? Are you saving for a second home? A wedding? Do you need income? Do you want to leave some money to your children? You probably have several financial goals. These goals will likely require different investment strategies. You should have a separate investment account for each goal. Don’t mix them up.

What is my investment time frame? If you need this money in a year or two or three, or if you don’t know when you need this money, then this is not investment money. This is bank money. Investing for a short or unknown period of time is dangerous. Murphy’s Law will apply when you need the money … the account will be down in value when you do. It is much better to earn a small but safe return under these circumstances than to risk your money being worth less than what you started with. Said differently, you have to have at least four or five years to put investment money to work. Investment odds favor the long term investor.

Do you need to get at the money if there is an emergency? I hope not. Every investor should have a pile of Emergency Reserves money in the bank for emergencies, so that you don’t have to tap investment money. Besides Emergency Reserves, it is a good idea to have a Home Equity Line of Credit (HELOC) as a backup to your Emergency Reserves. A HELOC is an ability to borrow money against your home. If you have an emergency that is bigger than your Emergency Reserves Account, a HELOC is a much better option than your charge card.

What is your risk tolerance? I love this question, but most folks can’t answer it. When markets are great, you have significant risk tolerance. When markets are awful and the world is falling apart, your risk tolerance is zero. You need to do some serious thinking and soul searching about this. What did you do about your investments when the world came to an end from October 2007 to March 2009?

What rate of return do you need on your money? If you have a financial goal, it has a time frame in which you have to save and earn a certain amount of money. You have to have a rate of return goal. It has to be reasonable and realistic. That rate of return implies a certain mixture of stocks and bonds in your portfolio. If you don’t achieve that return, you will have to save more than planned or extend the time frame to accomplish your goal. This stuff is all connected. Make sure you do the math.

Okay, now that you have answered these questions, you can begin to devise your investment strategy. That would involve reading the next article in this series in two weeks.

All articles in this series will be posted on my website If you have any question or comments I can be reached at I promise I will respond.


Michael J. McNamara, Ph.D., CFP®



Disclaimer: Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.

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