Investment planning is such an important piece of your financial freedom that it would behoove you to learn as much as you can about it. Unfortunately, the grade school system does not teach you anything about this topic which you will need throughout your adult life. 2008 was the year of the Financial Perfect Storm. We saw the simultaneous meltdown of the stock market, the housing market, and the credit markets. Almost every single day, the headlines shouted doom and gloom. Investors did not know which way to turn before getting clobbered again and again. Sound investment advice did not seem so sound anymore. What was the average investor supposed to do? What was a newbie investor supposed to do? What were Wall Street’s superstars doing while this financial bloodbath was going on?
To answer these and many other investing questions, it is important that one has at least a very basic understanding of how investment planning works. After the basics, it won’t take you long to realize how important this is towards your financial freedom. The kind of knowledge needed should be routine course work in the grade schools with continuation on a deeper level in high school. Sadly, as far as I can tell, it is totally lacking.
Every person who subscribes to the theories that are necessary to reach financial freedom knows that the number one rule is to pay yourself first. Ideally, this would be about 10{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} of your gross income so if a person is earning $50,000.00 per year they would be saving about $5,000.00 per year. Now the time has come to learn exactly what to do with that $5,000.00 per year that you are saving.
However, before we can do that, you need to understand the two most basic principles of investing and how they are related. These two tenets form the backbone of all your saving and investing through out your life and will determine if you reach true financial freedom! Therefore it is very important that you get them right. If you do not fully understand them, you could wind up throwing money to the wind with disastrous results!
O.K. With that being said, here they are: 1)The Risk and Reward Relationship 2) Asset Allocation. These two fundamental principles of investing are closely intertwined such that if you understand one, you will understand the second with no problem. Every single piece of your investment planning puzzle needs to be examined with your own risk tolerance and asset allocation. Get this right and your financial freedom will surely be forthcoming.
So what exactly does all that mean. In life, anything and everything that you could possibly invest in comes with a certain amount of risk. The more risk that you take on, the more reward you will get. The trick is to max out your reward without taking on too much risk. It all boils down to how well you like to sleep at night. Too much risk and you will find yourself staying awake worrying about your investments! Too little risk and your investments will not grow. You will have missed opportunities that are in the marketplace that do not pose too great a risk. This very important aspect of investment planning goes hand in hand with asset allocation.
Asset allocation is the way you distribute your money across various asset classes. For instance, if you had $10,000.00 to invest, you might place $6,000.00 in stocks and $4,000.00 in bonds. These are two of the many asset classes that you will come to know and understand when doing your investment planning. In time, you will learn that several other classes are needed to ensure your financial freedom. We will address that in a future article but I will close with this…you always want to leave a small portion of your investment funds in a cash account. Doing so will allow you take advantage of different opportunities that pop up from time to time. So in the above example which had you placing your $10,000 in 60{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} stocks and 40{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} bonds, you might instead choose a 55-35-10 split which would be 55{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} stocks, 35{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} bonds and 10{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} cash. If you have a small portion of your portfolio stashed away as cash, you will be poised to strike at some good investing opportunities that your broker will present to you.
