My Investing Guide for Dummies Part I

By Joel Barretto, CFPⓇ | via Negosentro.com |

In my 25 years as a financial planner, when people find out what I do for a living, the most common question I get is… “where should I invest my money?”  As if I can answer that question without knowing anything about you first.

It’s like coming up to a doctor and asking what medication to take for a nagging headache.  Would you prefer that doctor say “take 2 aspirins and call me in the morning,” Or, “let’s take some tests, x-rays, etc. before I can tell you how to take care of that headache?”

So before asking where to invest your money, you will need to chart your course and have a clear vision, based on the following questions:

  1. What is your goal or objective for investing the money (i.e. Retirement Income, future college education, buying a house, car, etc.)?
  2. What is your time horizon?  How long, before you will need this money?
  3. Considering that potentially higher returns mean higher risk to your money (possibility of principal loss); on a scale of 1-5, what is your tolerance to risk (assuming 5 is the absolute riskiest)?
  4. How much returns do you expect, given your tolerance to risk (be realistic)?
  5. Do you have enough cash reserves (for short term emergencies) aside from the amount you wish to invest?
  6. Do you have enough protection for unforeseen catastrophic events (long term emergencies) prior to investing?
  7. How liquid do you want your investment to be?
  8. How much can you afford to invest (systematically, lump sum or both)?

Once you have clarity on these questions, you may start looking into the proper allocation of your funds.  It is important that you understand the principles of sound asset diversification, in order to optimize your investments according to your goals, time horizon and risk profile.

To simplify this, let’s start with characterizing the two basic types of investment asset classes as follow:

  1. Fixed Assets – These are the monies you invest, where the growth will rely on only one thing… INTEREST (e.g. Time Deposits, bonds, fixed annuities, etc.).  This type of asset does not normally fluctuate in value (unless it’s traded in the secondary market) and your principal (original investment) is usually guaranteed.  Therefore, these assets typically have various degrees of safety.  But there is always a price to pay for safety.  In this case, it’s the lower returns that fixed assets usually offer.  In an economic environment when interest rates are low, fixed assets may lose against the rate of inflation.  Add taxes to the interest earned, and you may have a negative return due to taxes and inflation.  So if you’re thinking of putting all your eggs in this basket, then think again.  You may lose money without even knowing it.
  2. Equity Assets – These are the monies you invest, where the growth will rely on supply and demand factors of the economy (e.g. stocks, real estate, forex, gold, mutual funds, etc.).  They constantly fluctuate in value, hence there are no guarantees to your principal.  Because they carry a certain degree of risk to your principal, equity assets have historically shown higher returns against fixed assets over the long term, thereby making it a good hedge against inflation.

Asset allocation principles are based on these two basic asset classes.  Proper diversification means having the right mix of fixed and equity assets in your portfolio, according to your needs.  For example, if you are a more conservative and risk averse investor with a shorter time horizon, then perhaps a portfolio consisting of 60% to 80% fixed assets mixed with 20% to 40% equity assets, may be a good mix for you.

Therefore, the basic rule of thumb in asset allocation is… the more aggressive you are as an investor, the more equity assets you may infuse in your portfolio mix.  In retrospect, the more conservative you are as an investor, the more fixed assets and cash should be in your mix, and so on.

Once you understand the concepts behind these types of assets, it will be easier for you to understand how to create your own asset mix.

In my succeeding articles, I may go over and dissect some of the fixed and equity assets available in the marketplace, so stay tuned.

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Author Bio

Joel Barretto, CFP sold his financial planning practice in Irvine, California U.S.A. to promote financial literacy and awareness in the Philippines.  He is a respected Certified Financial Planner practitioner with over 24 years of experience in helping people optimize, manage and protect their wealth.  

He is a public speaker and lecturer on a variety of financial planning issues and strategies.  With a passion for entrepreneurship, Joel dabbles in venture capital projects and mentors up and coming entrepreneurs on growing their start-up companies.  He is a 2nd degree black belt in the martial art of Kempo and enjoys performing and directing stage musicals for community fund raisers. You can reach Joel at ask@joelbarretto.com.

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