You don’t need to know a lot to invest well. As long as you minimize expenses, properly allocate assets and avoid scams and imprudent practices you can grow your wealth better than most professional money managers.
Step 1: Define your goals
At minimum, you must meet life’s necessary expenses, such as food, shelter and health. Most likely, you wish to achieve more than the minimum. You may want to live more comfortably, travel more, perhaps afford some major purchases, and/or provide a decent inheritance to your kids. Investing isn’t gambling. It is a means to meet your goals most effectively. So know your goals.
Step 2: Assess your tolerance for risk
Investing should be a source of comfort and satisfaction, not angst and regret. Angst can come from declines in market value you did not count on. Regret can come from growing assets inadequately – the feeling you didn’t take enough chances. Higher returns get you to your goals faster but seeking such entails greater risk. You need to be comfortable in your own investment skin. To get comfortable, you need to determine your personal risk profile: both your wealth and nerves will be well served.
Step 3: Determine an appropriate asset allocation
Knowing your risk tolerance, you can estimate an appropriate asset allocation: the target percentage mix of stocks and bonds. Your experiences over time may affect your comfort with volatility; you should adjust your target mix accordingly.
Step 4: Select an institution
When deciding where to hold your financial assets, be sure you can access your money and invest in securities best suited to meet your needs at minimum cost.
Step 5: Select securities
With your stock portfolio you can use index funds to track the market or rely on active management via funds or individual stocks. Similarly, with your bond portfolio you can choose index funds or active management of funds and/or individual bonds and CDs.
Optional: Select an advisor
You can easily do all five steps above. You can take a brief quiz to assess your risk profile, determine a fitting asset allocation from your profile, open an account at a good institution, buy no-load index funds (or other appropriate securities) to match your target allocation and, well-positioned, get on with the rest of your life.
Instead, you may want help with one or more of these steps. Advisor fees will reduce your returns, but you can choose to make that sacrifice to have someone else do the work. If so inclined, read Chapter 50. You want to be sure you are being served and not sold.