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The Basics of Investing – Getting Started

Sigma Investment Counselors

October 28, 2014

With the plethora of events impacting the investing world (Ebola, ISIS, market volatility, Ukraine and gasoline price collapses), it is easy to lose sight of the basics of investing.  And, while the basics tend to be less newsworthy, they are much more important for a successful outcome over the long term than the crisis du jour.  Further, clients and friends on occasion ask us to provide quick rules of thumb to pass on to young people, so this blog serves as both a reminder for seasoned investors and as a recipe for those starting out.

Here goes.

First, make a budget and in that budget, include a category for saving.  Starting out, the amount is less important than just meeting this challenge.  But, as pay increases hit, the savings amount should be likewise increased.   

Once an emergency reserve has been established, invest additional savings for the long term in a diversified portfolio of common stocks with representation across the globe, and throughout the size dynamic (small companies, mid sized companies, and large companies).  If possible, this should be done through a 401k plan or an IRA.  Low cost index funds are the best investment vehicle for this.  While sophisticated and more substantial investors might rue the fact that it is difficult to “cherry pick” individual losing investments for tax purposes for those savings outside of a 401k or IRA, the flip side is that the index funds rarely generate taxable gains.  Hence, they have their own tax efficiency. 

Fixed income investments will eventually be added to the portfolio as retirement gets closer.

Stay away from “get rich quick” schemes or investment gimmicks.  If it sounds too good to be true, it probably is.

Certain “alternative investments” have merit, such as real estate or gold, but most of the rest are designed with an eye to making the promoters rich versus the investor. 

Life insurance and investing should remain separate activities.  If life insurance is needed for a specific period of time, which is generally the case, buy a term policy.  Term policies are the most cost effective and affordable option for life insurance.

So, that’s a start.  All questions or comments are welcomed.

Bob Bilkie, CFA®

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