Investment Planning 101

By Judy Loy, ChFC®, RICP®

Investment planning’s main goal is to provide common sense guidelines to allow investors and savers to make better decisions and to build their net worth. People are at various points in their lives and therefore are looking at different goals, so some areas of this article might be more useful than others. Hopefully, everyone will find ideas to move them ahead.

Start by setting financial goals. Just as individuals and families have different values, they will have different financial goals. Typical large financial goals that people save towards are college for their children, home ownership or retirement. Prioritizing is important when determining where to put your savings among your goals. Two tips to help: You can borrow for college but you can’t borrow for retirement. Also, buying a large home may be tempting, but think about how the monthly mortgage payment may restrict you from saving for other goals or from enjoying vacations or everyday activities.

Create an emergency savings. Don’t confuse saving and investing. Saving is for short-term objectives or emergencies and is typically invested in assets that do not fluctuate in principal. The first step to financial literacy is to set up a savings account, money market account or laddered CDs as a safety net. This safety net should be easily accessible and represent three to six months of expenses. This not only alleviates the need to take on credit card debt or a home equity loan to get through a rough period but it also helps avoid pulling from the long-term investments and derailing your long-term financial goals.

Pay yourself first. Budgets are hard. Make investing easy and automatic by having money deducted from your paycheck into your employer’s retirement plan, deducted from your checking into an IRA or into an investment such as a mutual fund. In this way, money comes out and gets invested before it’s spent elsewhere-thus, paying yourself first. Determine how much money you can save each month — this does not need to be a lot to start, it just needs to be a steady investment that becomes a habit of living then make it automatic and increase it at least annually.

Understand investment options and risks. Each type of investment vehicle has opportunity for return as well as corresponding risk. A financial consultant can help you determine your risk tolerance for investing based on your personality, income, age and lifestyle. For instance, a savings account at a bank or credit union has a low risk of loss since the funds are insured (up to $250,000), but you might only get a return on investment of a half a percent, if you are lucky. In contrast, purchasing stock can have a higher risk threshold (i.e. losing a percentage of your initial investment), but you would probably get a higher return over time, such as anywhere from 6 to 10 percent. 

Here are some other investment options to consider:

Certificates of Deposit. Called CDs, this investment, which is generally available from a bank or financial institution, offers a pre-determined rate of return for a specific period of time. The risk is low and CDs are typically FDIC insured for the principal, but the return will also be low and over time does not match inflation.

Common Stocks. Also called individual securities or equities, stocks can have a high rate of return but also have a high rate of risk since the stock value can change quickly based on the performance of the company that issues the stock. Shares of stock represent ownership in a corporation.

Mutual Funds. Mutual funds are investments that pool together a group of stocks, bonds or other investments, like Real Estate Investment Trusts (REIT). They are managed by an Investment Company that is skilled at analyzing market trends, stock performance and other factors to create a portfolio of investments in the Fund. The advantage of a mutual fund is that you are investing with many other investors and that your investment is professionally managed. The risk is on a mutual fund is determined by the investment holdings within the fund. Mutual Funds are not guaranteed.

Annuities. There are various types of annuities: deferred, immediate, fixed and variable. Each works differently and offers unique advantages. Basically, an annuity is an insurance product that guarantees the annuity holder a set amount of money each month for the rest of the person’s life, once the annuity has been locked (annuitized). The downside is that once the investment is locked, the holder no longer owns the total value of the annuity. Fees can be particularly steep as well. There are many types of annuities and they are very complicated, so if you are interested in this type of investment vehicle, please talk to a financial advisor to get the full explanation. There are times when an annuity is just the right investment for a client.

Bonds. Also called fixed income, a bond is an interest-bearing security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity. Zero-coupon bonds pay both the imputed interest and the principal at maturity. Because of their fixed interest rate and higher claim on company assets (for corporate bonds), bonds are typically considered safer investments than stocks.

Keep track of how your investments are performing
Depending on the type of investments you have, you will want to monitor your investments at least quarterly to see how they are performing. Educate yourself about market trends, economic conditions and individual investment performance. Stocks have traditionally performed better than just about any other type of investment over time, but the key is to hold them long enough to see the stock increase in value.

Getting investment help. A certified and licensed investment advisor is trained to understand investment options and work with individuals, businesses and non-profits on their overall goals, risk tolerance and investment choices. Keep in mind that many investment vehicles can have hidden charges. For instance, one of my clients recently asked me to review an annuity she owned. The yearly charges and fees were 3.65 percent, which tended to eat up any returns the annuity had produced. 

As a fee-based investment manager, I oversee a large portfolio of client investments. Much like a mutual fund manager, I pay close attention to the investments, market trends and the economy to determine what investments are best for my clients. There are no hidden fees and each client has a portfolio of investments that matches their investment goals and risk tolerance for their age.

Judy Loy is a Registered Investment Advisor, RICP®, ChFC®, and CEO, Nestlerode & Loy Investment Advisors, State College, Pa. Judy can be reached at jloy@nestlerode.com or at 814-238-6249.

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