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Because investing is not a sure thing in most cases, it is much like a game you don't know the outcome until the game has been played and a winner has been declared.

Anytime you play almost any type of game, you have a strategy. Investing isn't any different - you need an investment strategy.
Many first time investors think that they should invest all of their savings. This isn't necessarily true. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are.

While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out - especially for first time investors. The good news is that if you have chosen your stocks carefully, you won't need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals.

You may think that the time to sell is when the stock value is about to drop and you may even be advised by your broker to do this. But this isn't necessarily the right course of action. Stocks go up and down all the time, depending on the economy, and of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up.

You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things combined affect the value of stock.

But there are really only three good reasons to sell a stock.
  1. The first reason is having reached your financial goals. Once you've reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account. This is a common practice for those who have invested for the purpose of financing their retirement.
  2. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop.
  3. If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell, especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share.

The person has taxable interest income and nondeductible consumer debt interest where the "spread" is negative. A negative spread exists where the after-tax cost of the borrowed funds exceeds the after-tax income from the investment.

Example: A person has an auto loan with an interest rate of 8.5%. The federal tax bracket is 28% and state is 5%. Because the interest is non-deductible, the true cost is closer to 11%. This same person has a CD that is earning 6%. The interest income from the CD is taxable and the after-tax yield is closer to 4%. Solution: A better use of the taxable income producing investment would be to pay off the consumer debt.

The person is carrying a large amount of consumer debt with the ability to obtain an equity loan on his/her home. Solution: Replace the consumer debt with a home equity loan. Reasoning: The person in the example above must earn approximately $ 1.31 to $1.37 in order to pay $ 1.00 of non-deductible interest. If the person can make the interest deductible by transferring the debt to a home equity loan, he will need to earn only $ .63 to $ .69 to pay $ 1.00 of interest!

Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance. Determining one's risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.

For instance, if you plan to retire in ten years, and you've not saved a single penny towards that end, you need to have a high risk tolerance - because you will need to do some aggressive " risky " investing in order to reach your financial goal. On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time.

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance. For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do? Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out, if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

There are several different types of investments, and there are many factors in determining where you should invest your funds. Of course, determining where you will invest begins with researching the various available types of investments, determining your risk tolerance, and determining your investment style, along with your financial goals.

If you were going to purchase a new car, you would do quite a bit of research before making a final decision and a purchase. You would never consider purchasing a car that you had not fully looked over and taken for a test drive. Investing works much the same way. You will of course learn as much about the investment as possible, and you would want to see how past investors have done as well. It's common sense!

Learning about the stock market and investments takes a lot of time but it is time well spent. There are numerous books and websites on the topic, and you can even take college level courses on the topic which is what stock brokers do. With access to the Internet, you can actually play the stock market with fake money to get a feel for how it works. You can make pretend investments, and see how they do. Do a search with any search engine for Stock Market Games or Stock Market Simulations. This is a great way to start learning about investing in the stock market.

If you are ready to invest money for a future event, such as retirement or a child's college education, you have several options. You do not have to invest in risky stocks or ventures. You can easily invest your money in ways that are very safe, which will show a decent return over a long period of time.

  1. First consider bonds. There are various types of bonds that you can purchase. Bonds are similar to Certificates of Deposit. Instead of being issued by banks, however, bonds are issued by the Government. Depending on the type of bonds that you buy, your initial investment may double over a specific period of time.
  2. Mutual funds are also relatively safe. Mutual funds exist when a group of investors put their money together to buy stocks, bonds, or other investments. A fund manager typically decides how the money will be invested. All you need to do is find a reputable, qualified broker who handles mutual funds, and he or she will invest your money, along with other client's money. Mutual funds are a bit riskier than bonds.
  3. Stocks are another vehicle for long term investments. Shares of stocks are essentially shares of ownership in the company you are investing in. When the company does well financially, the value of your stock rises. However, if a company is doing poorly, your stock value drops. Stocks, of course, are even riskier than Mutual funds. Even though there is a greater amount of risk, you can still purchase stock in sound companies, such as GE, and sleep at night knowing that your money is relatively safe.
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The important thing is to do your research before investing your money for long term gain. When purchasing stocks you should choose stocks that are well established. When you look for a mutual fund to invest in, choose a broker that is well established and has a proven track record. If you aren't quite ready to take the risks involved with mutual funds or stocks, at the very least invest in bonds that are guaranteed by the Government.

If you're taking a vacation, you plan carefully. You decide on a foliage tour or a visit to a theme park, a bed and breakfast or a condominium, one week or two. You try to avoid common "traps" of vacation travel -- crowds, long waits, and high prices. Investing for retirement is a lot like vacation planning: the more carefully you choose your strategies, the more comfortable you expect to be when you retire. And, like vacation planning, you need to avoid investing traps that can snare your savings.

Watch the Store - To reach your goals, monitor your investments. Correct mistakes quickly. A frequent error investors make is to carefully design their retirement investment strategy and then expect it to perform on automatic pilot. Look at your account regularly to be sure your investments are performing as you anticipated. If, over a reasonable time, your investments don't meet your needs, make any necessary changes.

Don't Overdo It - You're investing for retirement and that's a long-term proposition. Don't worry about daily market gyrations. If you sell every time an investment declines slightly, you'll not only forego some good opportunities for capital appreciation, but you'll also never have a restful moment. By matching your mutual fund's performance against that of similar funds and appropriate benchmarks, you'll be better equipped to spot a trend that's not just a flash in the pan. A quarterly check can tell you whether your fund is under-performing or keeping up with its peers and relative benchmarks.

Don't Be Too Conservative - If you invest all of your money in a money market or similar fund, your risk may decrease but so will your return potential. Investing in funds that seek to preserve your principal means that your return probably won't do much more than keep up with the current inflation rate. To have enough money for a comfortable retirement, you need some investments that offer long-term growth potential. Diversifying your investments among different asset classes can help to reduce your risk. When you diversify, you put some of your money in conservative investments such as market funds or even corporate or government bonds and the rest in investments that seek higher returns although typically at a higher level of risk.

Don't Make Unnecessary Withdrawals - In a financial crunch, you may be tempted to take money out of your retirement account. But, if you take an early withdrawal, you may be subject to a penalty as well as income tax at your current ordinary income tax rate. Just remember that any money you withdraw from your account is not being invested for your future. Bottom line: Leave your money invested until you retire.

The difference between the amount for which you sell the capital asset and your basis, which is usually what you paid for it, is a capital gain or a capital loss. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Your basis is generally your cost plus improvements. You must keep accurate records that show your basis. Your records should show the purchase price, including commissions; increases to basis, such as the cost of improvements; and decreases to basis, such as depreciation, non-dividend distributions on stock, and stock splits.

Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return. Capital gains and losses are classified as long-term or short term. If you hold the asset for more than one year, your capital gain or loss is long-term. If you hold the asset one year or less, your capital gain or loss is short-term. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property.

Don't put all of your eggs in one basket! You've probably heard that over and over again throughout your life ... and when it comes to investing, it is very true. Diversification is the key to successful investing. All successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments might include purchasing various stocks in many different industries. It may include purchasing bonds, investing in money market accounts, or even in some real property. The key is to invest in several different areas not just one.

Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you will actually be at less risk also.

For instance, if you have invested all of your money in one stock, and that stock takes a significant plunge, you will most likely find that you have lost all of your money. On the other hand, if you have invested in ten different stocks, and nine are doing well while one plunges, you are still in reasonably good shape.

A good diversification will usually include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by. This is okay, but if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will see better returns.

Experts also suggest that you spread your investment money evenly among your investments. In other words, if you start with $100,000 to invest, invest $25,000 in stocks, $25,000 in real property, $25,000 in bonds, and put $25,000 in an interest bearing savings account.

Now is a good time to invest in your home.

If you sell your residence, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). To exclude the gain, you must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Generally, you cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude gain, you must include it in income. To determine the maximum dollar limit you can exclude and for additional information, contact your Cook and Company Agent. Note: You cannot deduct a loss on the sale of your home.


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