Get Started in Investing

Do you hear co-workers or friends talking about their investments and
wonder how they got started? How'd they come up with the money to
invest? How'd they know what to invest in? Many people don't know where
to start, so they never start at all.

The vast amount of information about investing, the wide array of
investment choices, and the risk are intimidating and can prevent you
from taking those first steps. It doesn't have to be that way. You only
need to know a few basics in order to begin investing in your future.

Basic Assumptions

First, some assumptions. This article assumes you have your
credit card debt under control. It makes no sense to invest in stocks,
bonds, or mutual funds if you have thousands of dollars in credit card
debt at interest rates in excess of 10%. You don't have to be
completely debt-free, but you should be making serious inroads into
your debt each month, and you should be paying very low interest rates
on that debt.

This article also assumes you have an emergency fund of at least three
months worth of basic living expenses (preferably six months worth) in
case of a job loss, disability, etc. And finally, this article assumes
that if your employer offers a 401(k) plan, you're maximizing your
contribution and diversifying your investments in the plan.

Where Do I Find the Money to Invest?

The first question for many people is "where do I get the money
to invest?" There are plenty of stock mutual funds that allow you to
invest with $500 or less. Use your next bonus at work, or your income
tax refund, or put in some overtime for extra cash. If you just can't
come up with $500 to start your portfolio, many funds will allow you to
skip the initial lump sum investment if you sign up for automatic
monthly withdrawals of $25 to $50 from your checking account.

How Do I Choose an Investment?

You're ready for some long-term investments. How do you choose?
The first step is to know what your goals are. Are you saving for a
house? A college education? Retirement? The type of investment you
choose will depend on the amount of time available before you need the
money. Stocks are considered long-term investments, and it's best to
plan on holding stocks or stock mutual funds for five years or longer.
If you need the money sooner than this, you may reduce your return by
cashing in when the stock's value is down.

How Do I Determine My Risk Tolerance?

Next, you need to know your risk tolerance. If you hide your
money under your mattress because you don't trust the bank, then you're
probably not going to feel comfortable investing in volatile technology
stocks. CNBC's Investment Risk Test can help you determine what level
of risk you can tolerate.

How Do I Choose an Investment?

How do you decide where to put your money? Most experts
recommend spreading your money over several different types of
investments to reduce risk, because typically one type of investment
does well when another doesn't. For example, usually when returns on
stocks and stock mutual funds are high, returns on bonds are low, and
vice versa. By having money in both types of funds, you're more likely
to get a decent combined return if one category takes a downturn. Your
asset allocation should be tailored to your risk tolerance and the
number of years before you'll need to withdraw the money from your
investments.

For beginning investors, I recommend stock mutual funds instead
of stocks in individual companies. Why? It's all about risk. A
well-chosen stock mutual fund is less risky than an individual stock
because mutual funds invest in many companies, thus spreading out the
risk. If one company does poorly, the fund as a whole may still have a
good return. If you buy stock in one company and the company does
poorly, you lose money.

Where Do I Find Information About Stocks and Mutual Funds?

Once you're ready to start choosing a fund to invest in, there
are many excellent Web sites to help you. My personal favorite is Morningstar the respected mutual fund rating company. Their powerful Fund Selector
allows you to search for mutual funds based on what's important to you.
For instance, if you want a list of funds that allow initial
investments of $500 or less, you can click on the appropriate box,
leave all the other boxes as is, and you'll get a list of funds that
accept initial investments of $500 or less, with their YTD return,
expense ratio (the amount of administrative and other expenses that the
fund manager deducts from your return each year), their Morningstar
rating, and more. Click on an individual fund name and get detailed
information about that fund.

Once you've chosen a fund you feel comfortable with, call their
800 number and request a prospectus (a description of the fund, its
investments, and the returns it's earned in the past) and an investor's
kit. Fill out the form, send in your money, and voila! You're an
investor.