If you learn how to invest the right way you can invest for your future relatively free from worry without putting all your money in the bank. Here are the steps you need to take to invest for the long term like a professional, complete with a recommended best investment portfolio.
First, accept the fact that you will need to learn how to invest because you will never get ahead playing it totally safe. A 1-year CD pays less than 1% interest. Second, classify yourself on a scale of 1 to 10 in terms of risk tolerance with a 1 being totally safety conscious and 10 being aggressive. Since most people are comfortable with only moderate risk, we will base our best investment portfolio on a risk factor of 3 to 5, moderately conservative.
Third, view investing as a long term proposition whether you are 21 or 71 years old. Expect that even the best investment portfolio will fluctuate in value somewhat. Fourth, invest in tax-favored accounts such as IRA and 401k plans if possible, and do not overlook Roth plans that are FREE from federal income tax.
Fifth, invest only in the three basic mutual fund types: money market funds, bond funds, and stock funds. Avoid sales charges and high yearly expenses by investing in no-load funds, and allow your dividends to reinvest to buy additional fund shares. If you are investing outside of your employer’s plan check out Fidelity and Vanguard, the two largest fund companies in America. Both offer no-load funds and have favorable yearly expenses.
Step Six is where we get down to the nitty-gritty of where and how to invest with only moderate risk. Keep 20% of your investment portfolio invested in money market (MM) funds to earn interest with high safety. Invest and keep 40% in intermediate-term bond funds to earn higher interest with moderate risk. The remaining 40% goes to stock funds for long term growth and higher profit potential at a higher level of risk.
You can get by owning just one MM fund and one or two bond funds. If you are in a 401k plan with a “stable account” option, substitute it for the MM fund if it pays more interest. Stock funds are a different story. Here you need broad diversification, and should concentrate on funds that invest in large-cap blue chip companies like GE, IBM, Exxon, and so on. An S&P 500 Index fund tracks the stock market and is an ideal holding. You may want to hold 3 or 4 different stock funds, including an international fund, to be heavily diversified.
Step Seven is where you must follow through so that our best investment portfolio can deliver for you over the years and you can sleep at night without worry, knowing that you have a sound investment strategy. Realize that nobody on the face of this earth knows, at any given time, what the best investment is or how to invest profitably with a high degree of certainty. That’s why we diversify and put together an investment portfolio. In Step Six we said to KEEP 20% in MM funds, 40% in bond funds, and 40% in stock funds. KEEP is the operative word, because over time things always change in the investment world. Each of our three basic fund types will have periods of time when they produce good returns and periods when they don’t.
You must review your progress at least once a year, like in January. And you will need to make adjustments by moving money around when your percentages get off track as the various funds perform differently. For example, if your stock funds total less than 40% of your portfolio value, move money to them from the other funds to get back to 40%. In this way you will stay on track, and in the process be shifting money from funds that are getting pricey to funds that are getting cheaper. This lowers your average cost per share over time in both your bond funds and stock funds, and makes managing your investment portfolio an automatic ongoing process.
Now, if anything in this article confused you don’t give up the ship. You can learn investment basics and learn how to invest and follow this plan. Just start at the beginning with a good investment guide, and keep reading articles about investing. It’s easier than you think if you learn the basics first.