Investment Basics

There is no time like the present to begin investing in your future. Some people believe they cannot afford to invest, but that is not the case. By saving as little as $5.50 per day, you can earn over $2,000 in one year, which is enough to open many different types of higher yielding investments.

In this module, you will learn some of the basic ways to invest your money. We will provide you with information in the following areas:

Section 1:  Set Financial Goals

One of the most famous passages from the book, “Alice in Wonderland,” is when Alice and the Cat are talking about where she should go:

Alice: Would you tell me, please, which way I ought to go from here?

The Cat: That depends a good deal on where you want to get to.

If you want to be financially stable and have a good future, then you cannot just wish it to happen, you must plan for it. Those who are financially strong and stable follow a plan they have established for many years. One of the keys to this plan is to set goals and work to achieve them.

Let’s take a look at four steps you should consider when setting financial goals.

Step 1:  Identify and write down your financial goals.
Whether your goal is saving to send your child to college, for a down payment on a house, going on vacation, buying a new car, paying off credit card debt or planning for retirement, it must be written down. You are more likely to accomplish your goals if you write them down. Be realistic but recognize that if you save and work hard, you can save for most anything you desire.

Step 2:  Break down your goals.
It is important you break down your financial goals into smaller chunks as soon as you set them. Set short-term goals (less than one year), medium-term goals (1-3 years) and long-term goals (5 years or more). Be sure you are realistic with your goals, but that you stretch yourself so you can accomplish what you desire. By placing a time frame on your goals, you are motivating yourself to get started and allowing yourself to have a chance to succeed.

Step 3:  Educate yourself, do your research and get assistance when necessary.
It is a good idea to obtain as much information as you can about your goals. For example, if you are saving for a vacation, look around for the best deals and establish goals to achieve something affordable. In terms of paying off your debt, you should review your current spending habits and determine what you can cut out and what you can continue to do. And, if you are interested in a good retirement savings plan, you should research a good financial planner to discuss your options and other important investment strategies.

Step 4:  Evaluate your progress as often as needed.
It is a good idea to review your progress monthly or quarterly to determine how you are doing. Each year you should also review your goals and adjust where necessary. If you need to make adjustments, you should do so as soon as possible so you can achieve your long-term goals.


Saving for Retirement

The time to start saving is NOW. No matter how old you are, it is never too late to save for your future. In this step of the investment process, you will determine your financial health in order to develop financial goals. Click on the link below to enter your asset and liability information.

The Net Worth Form 

There are five options to consider when saving for retirement:

  1. 100 Percent Rule:  In the past, experts have indicated that retirees can live on 70 to 80 percent of their pre-retirement income; however, given rising medical costs and longer life expectancy, a person will most likely need 100 percent of his/her pre-retirement income in retirement.
  2. Two-Thirds Rule:  According to the Social Security Administration, Social Security typically provides only about one-third of a retiree’s income; therefore, at least two-thirds must come from money saved for retirement.
  3. 13 Times Rule:   In order to receive guaranteed lifetime income payments through an annuity, an investor will need to purchase an annuity for approximately 13 times his/her annual income. For example, if an investor would like to receive approximately $50,000 a year in annuity payments, he/she will need to purchase a $650,000 annuity..
  4. 110 Rule:  In years past, it was a rule of thumb that an investor’s portfolio would include an increasingly higher percentage of fixed investments, and a lower percentage of riskier equity investments (e.g., stocks). Given that today Americans are living longer, they may need to keep a higher percentage of assets in equity investments. To utilize the 110 rule, you will determine the allocation of your retirement investments by subtracting your current age from 110, and the result is your equity investment allocation. For example, if you are 40 years old, 70 percent of your portfolio should be in equity investment and the remaining 30 percent should be in fixed investments.
  5. Rule of 72:  Retirement saving should take inflation into account. The Rule of 72 determines the number of years it will take for a person’s money to be worth half of its current value at a given inflation rate. You do this by dividing the inflation rate into 72 and then structure your investment plan to include investments that will outpace inflation. For example, to determine how long it will take for your money to be worth half its current value given a five percent inflation rate, divide 72 by 5; the result is 14.4 years.

Many financial experts urge clients to invest at least 10 percent of their income. In some instances, the amount you should save may require you to reorganize your budget. By reducing your spending in some of the more flexible expense categories, you can reorganize your budget to reach that goal. The following is an example of how a household making $75,000 a year might do it:


Typical Expenditures

Expense Categories

Without Investment

With 10% Investment

























In addition to reorganizing your budget, you may also consider the following tips as well:

  • Pay off your credit card debt:  It is best to pay off the credit card with the lowest balance first, while making the minimum payment on others. For example, if you have three credit cards, and their balances are $1,500, $5,000, $10,000, you should focus on making more than the minimum payment on the $1,500 card to pay that off quickly. Then, focus on the $5,000, then the $10,000. The key is to NOT put money on the card that you are trying to pay off.
  • Participate in the retirement plan at work:  It is a great idea to participate in any type of retirement plan at work, especially if your employer will match your investment. Furthermore, if you can have them automatically deduct your investment, you will never see the money and never be tempted to use it for something else.
  • Pay yourself first by establishing payroll deduction:  One of the most important things to do when you save is to pay yourself first. If you pay yourself first using some type of automatic payroll deduction, you will never know what you missed.
  • Save or invest any gifts, bonuses, or payroll increases, or use them to pay off debt so you can invest more money in the future:  A great way to save or pay off debt is to use the money you receive through gifts, bonuses, or payroll increases at work. Don’t spend your bonus before you receive it!
  • Reinvest all dividends and interest payments:  Let your money work for you by allowing it to compound over time.


Saving for College

If you are planning for you or your children to attend college, you should start saving right now. In the 2013-2014 school year, the average cost for state residents at a public college was estimated at $9,000 per year, out-of-state residents attending public universities average cost was $22,000, while the cost for a private college education was estimated at approximately $30,000 per year. Let’s take a look at some ways you can begin to save effectively for a college education:

  • Start a college account for your child when he/she is born.
  • Add to your college fund every pay day; saving automatically is the easiest way to do this.
  • Choose investments when your child is young that will maximize growth.
  • Time your investments to mature when your child reaches college age.

In the chart below, you will be able to see how planning ahead really does pay when it comes to college costs. The chart shows four-year college costs, including tuition, room and board, books and transportation, and the monthly investments required to finance them. It is assumed that there is an 8% annual increase in college costs and a 6% annual after-tax investment return, and no additional investments or earnings on the balance invested once the child starts college.



Monthly Investment

Years Until Child Starts College












































Investments are all about maximizing the rate of return and the power of compounding. This means that if you keep your money invested for long periods of time, you will see your money grow. Whatever you plan to save for, do it now. Don’t wait until tomorrow because that is just another day you are not earning money for your future.

Section 2:  Get Expert Advice

What do you want to do in the future? Do you want to buy a home, or save for college? Do you want to retire at a certain age? Once you know the answer to these questions, the choice of a financial expert becomes easier.

Financial advisors have a variety of qualifications that typically require specialization. Once you have determined your goals and direction, it will be easier to determine the type of advisor you need. You don’t have to know all the answers; an advisor will help you with that. You just need to know your motives, or your goals.

Choosing an Expert

As you begin to look for a professional advisor, the first thing you need to do is find someone you feel comfortable around. Then, you need to look at his/her experience, reputation, expertise, and talk to some of his/her existing clients. There are many different types of advisors from which to choose. Let’s take a look at each a little more closely by using your mouse to click on each bullet:

  • Stockbrokers:  Registered representatives who work in brokerage firms and provide advice on specific investments. They make their money from commissions.
  • Service Representatives:  Financial representatives who can help with annuities, mutual funds, certificates of deposit, money market accounts, etc. Service Representatives are paid a salary and sometimes commissions on their sales.
  • Certified Public Accountants:  CPAs work in private practice and provide accounting and investment advice. You pay them a fee for their services.
  • Insurance Agents:  In addition to selling insurance products, many insurance agents will offer financial advice to their customers. They make their money from commissions.
  • Money Managers:  Large companies and financial institutions provide managers to support large investors’ assets and liabilities. They receive a fee for their work.

Be Involved in the Process

It is important that even though you may depend upon an expert for advice, you must be fully engaged in your financial business. Make sure you play an active role in managing your assets by reading the material you receive from your advisor(s), keeping good records, and making the most of the business relationship.


Section 3:  Develop and Implement an Investment Strategy

When you develop your investment strategy you must first take your age into account. Shift your strategy regarding risk as you get older.

A diverse portfolio from various sectors of the financial market will include a balanced mix of stocks, bonds and other traditional accounts.

Based on your overall financial goals, you should develop a plan and stick with it. No matter how much you have to invest, always make sure you keep track of your investments and remain involved in the process. Click on the INVESTMENT WORKSHEET below to begin the process of setting feasible goals to start the process.

Investment Worksheet 

Asset Allocation

Based on your financial goals, it is critical to allocate funds and diversify your investment. Let’s first focus on what is meant by asset allocation. By definition, asset allocation involves “dividing an investment portfolio” among the following asset categories:

  • Stocks
  • Bonds
  • Cash

The process of determining the correct mix of assets in your portfolio is based primarily on two main issues:

  • Time.  When do you plan to reach your financial goals? An investor with a longer time frame may feel more comfortable taking on riskier investments than someone with a shorter time frame.
  • Risk Tolerance.  Are you willing or able to lose some of your original investment in exchange for greater returns? The more aggressive investor will feel comfortable with losing more money in order to get better results. The more conservative investor will more than likely favor investments that will preserve the original investment.

It is important to point out that every investment you make has some type of risk attached to it. It is just a matter of how much risk you can tolerate. By including asset categories with investment returns that are diverse in different market conditions, you can protect yourself from any type of significant loss (for the most part).


Once you determine where you would like to allocate your funds, you should make sure you diversify among the asset categories as well. The key is to determine which segments of the asset category perform differently under different market conditions. For example, one way of diversifying your investments within an asset category is to invest in a wide variety of corporations and/or industry sectors. However, the stock portion of your investment would not truly be diverse unless you invest in approximately 10-12 different stocks.

Because diversification within an asset category can be challenging, many people choose to invest in a mutual fund. However, mutual funds must also be diverse to be truly effective. If the fund is too narrowly focused, you may need to invest in more than one mutual fund.* For example, if one mutual fund focuses on one particular industry sector, you may need to purchase another mutual fund in another industry sector to be diversified. Be aware, though, that there may be fees tied to any investment you make, so make sure it is what you want.

*A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, and other financial instruments. A mutual fund makes it easy for an investor to own a small portion of many different investments.


Types of Investments

The investment world can be as complex or simple as you would like to make it. There are many options available from which to choose when you have your investment plan ready to implement. Let’s take a look at some of the different investment tools available in more detail so you will have a better understanding of each.


A corporation has stockholders or shareholders that own a percentage of the company. The stock is purchased as an investment in the company with the understanding that the company will be profitable and stock price will go up. There are two main types of stocks:  common** and preferred.*** Additionally, corporations may issue different classes of stock for different purposes, such as ownership, investment purposes, market prices, dividend policies, etc.

**Common stockholders elect a company’s board of directors and actively participate in the company’s success or failure. They receive dividends as long as the company is profitable, obligations to commercial creditors and bondholders are met, and the board declares such dividends.

***Preferred stock is defined as capital stock where the investor is given a specific dividend that is paid before any dividends are paid to common stockholders; in other words, it takes precedence over common stock in the case of liquidation. Investors in preferred stocks have partial ownership in a company, but preferred stockholders do not have the voting rights of common stockholders. Preferred stockholders are paid a fixed dividend that does not fluctuate; however, the company does not have to pay this dividend if it is not financially able to do so. Preferred stockholders have a greater claim on the company’s assets than common stockholders.

Sometimes shares begin to increase in price beyond what the company desires because investors are hesitant to buy. When this takes place, a “stock split” is issued by the company. For instance, if a company’s stock reaches $200 and the company declares a “two-for-one split,” the shareholder gets two shares with each worth $100; this lowers the price and gives potential investors an opportunity to buy the stock.

Usually, one share of stock represents one vote. The value of stock is dependent upon market conditions at the time of purchase and the time of sale. Most people hope to purchase the stock at a lower rate than they sell it for at a later date. Timing is everything in the stock market.


Bonds are loans made to corporations and governments. Borrowers get cash and investors earn interest, similar to loans you get for your home or car. Bonds are considered to be less risky than stocks since companies pay off all their debts (including bonds) before handling obligations to stockholders. There are three primary types of bonds. Use your mouse to click on each type of bond to learn more about it.

  • Corporate Bonds: A type of bond issued by a corporation that often pays higher rates than government or municipal bonds because they are a little more risky. The bond holder receives interest payments (yield) and the principal, usually repaid on a fixed maturity date. Corporate bonds are used to raise capital, cover expenses, and finance takeovers or management structure. Corporate bonds are traded on major exchanges and are taxable.
  • U.S. Treasury Bonds:  Treasury Bonds (also known as T-Bonds) are the most well-known type of bond on the market. They are used by the United States government, and therefore, are considered to have no risk. They are issued in $1,000 increments and pay semi-annual coupon payments. Usually investors turn to treasury securities when the credit and equity markets are unstable. Treasury Bills are issued through the U.S. Treasury; however, the primary means of debt issuance is through auction by the Federal Reserve Bank. Treasury Bonds are used primarily to pay for government activities and pay off national debt. They are available in three choices:  bonds, bills and notes. A key difference is their term – from 13 weeks to 30 years.
  • Municipal Bonds:  A bond that is issued by a city, county, state or other government for the financing of public projects, or to supplement operating budgets. It is usually a tax-exempt investment.

Bonds are collateralized by a variety of ways from mortgages to debentures (credit of the issuer). Bonds can be purchased through stockbrokers and some banks. Treasury bonds are sold at issue directly to investors without any representative or commission. Bonds are often sold in bundles that require a significant minimum investment.

Mutual Funds

Mutual funds are the collection of the investment products previously discussed into one package – stocks, bonds, other securities, etc. Mutual funds provide the investor a means of diversifying without having to select individual securities. Additionally, they offer the added advantage of significant purchasing power that comes from the size of the fund.

Mutual funds are created when a mutual fund company decides upon an investment concept. The company then issues a prospectus and sells shares in the fund. The success of the fund creates interest in other funds for the company, so success brings more success.

Many mutual fund companies create a “family of funds” that provide the investor a selection to choose from to customize a solution for each customer. For example, an investor may select a high risk strategy and a more conservative strategy all with one company by purchasing two types of mutual funds.

Money within a mutual fund moves in and out constantly in high amounts which requires skilled professional management. These professionals manage mutual funds on a full-time basis and are there to serve the investor. An investor can measure whether a fund has performed well in the past by using benchmark services or through his/her advisor.


When an investor decides to invest in cash or a cash equivalent, we are referring to savings deposits, treasury bills, money market accounts, money market funds, certificates of deposit and even individual retirement accounts (IRAs). While these are the safest investment a person can make, they also provide the lowest rate of return when compared with stocks and bonds. In most instances, the federal government guarantees these investments (e.g., FDIC, NCUSIF, etc.).

Section 4: Rebalancing

Investors should rebalance their portfolio on a regular basis. Rebalancing is when you bring your portfolio back to its original asset allocation. It is necessary because over time, your investments may get out of alignment with your investment goals. Additionally, rebalancing keeps your investments from focusing on one type of asset category, returning your portfolio to a comfortable level of risk.

For example, let’s say you determined that your stock investments should represent 50% of your portfolio. However, after a recent increase in the stock market, your stock investment represents close to 75% of your portfolio. You’ll need to either sell stock or purchase investments from another asset category to adjust to the original asset allocation mix.

It is important to understand all of the ramifications of rebalancing your portfolio as some fees or tax implications may arise. Many financial experts recommend that investors rebalance their portfolios on a regular time interval, such as every six or 12 months.

Others recommend rebalancing only when the weight of an asset class increases or decreases more than a certain percentage that an investor has identified in advance. Whatever is decided, rebalancing is most effective when it is done on a relatively infrequent, but regular basis.


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