Home » Investing

How To Make Wise Investment Choices

5 November 2009 8 Comments

This guest article was written by Adrienne Carlson, who regularly writes on the topic of executive mba programs. Adrienne welcomes your comments and questions at her email address: adrienne.carlson1@gmail.com

It’s risky business indeed, when you want to put your hard earned money into the stock market. What with all the ups and mostly downs that are going through this industry right now, you’re right to be wary of stocks and funds, especially if you’re a newcomer and just testing the waters. Stocks and bonds are good investment options, if you know what you’re doing with your money. And if you’re looking for tips on making wise investment choices, read on:

  • Never look for huge payoffs: Always remember that the more you expect, the greater the risks. So while you may have a chance of gaining large amounts of money, you may also end up losing much more. The stock market is very fickle and not predictable at all, so don’t look for huge payoffs – in your greed, you may lose more than you gain.

Kevin says: I don’t necessarily have a problem looking for huge payoffs as long as I understand the risk.  I think that there is a place for speculation in one’s investment strategy as long as they understand the risk and implement methods to limit the risk.

  • Always clear your debts before putting money into investments: If you have outstanding debts, pay them off first before investing money in the stock market. You may want to play around with the rates of return and think that you’re probably going to get a higher return on your investment, using which you can pay off your debt which has a lower interest rate. But since stock market returns are not a certainty, trying to make a fast buck by playing around with interest rates is a foolish idea. You may find yourself deeper in debt than before.

Kevin says: This is a good point that you should definitely get rid of debt prior to building an investment portfolio.  The only exception to this in my opinion would be to participate in your 401(k) to take advantage of company matching since this is essentially free money.  Every other dollar should go towards paying down debt.

  • Play safe and take the fixed deposit route: If you want to play safe and get a guaranteed return for your money, you’re better off going with deposits and bonds that have fixed rates of interest for a certain period of time. This way, you know for sure that you are assured of a certain amount of money at the end of this period.

Kevin says: Fixed income has a place in some people’s financial plans, mostly people close to retirement.  Young people can take on a little more risk in my opinion.  For me, I have my cash reserves (which I basically assume zero return) and my stocks portfolio (which I aim for large returns).

  • Do your research before investing: It is always wise to do your research before you invest in stocks and mutual funds. If you do know something about the stock market, study the conditions carefully and keep monitoring your portfolio. If not, entrust your money to someone else you trust and who does know the market better than you do.

Kevin says: This is an interesting topic and while this is very against the grain, I actually don’t think research is as important as I used to.  So many stocks go up and down with the general market now, that I almost think technicals are more important than fundamentals in today’s market.  Research and fundamentals have value but in 2009, technicals dominate.

  • Stick with your plan: Don’t hope for your investments to show gains or offer huge returns immediately. Be patient, don’t keep buying and selling at random, and wait for your money to grow. Take the long term strategy instead of seeking money instantly.
  • Diversify your portfolio: It’s not good to put all your eggs in one basket, so make sure your portfolio is a diverse mix of bonds, stocks and mutual funds. If one is on the down trend, the up trend in others will end up saving you from losing too much money.

Kevin says: I have different views on diversification that most people.  I tend to be more speculative in nature.  If you’re looking for diversification, you can do it through a handful of ETF index funds in my opinion, avoid individual companies.  And, you don’t really need to pay someone to build/manage a diversified portfolio since it’s so easy to mimic broad market performance through ETFs.

These may be conservative ideas, but they do help you manage your money and make a small profit, a little more than a savings account will give you and a lot less than bold and risky ideas will. However, the main issue is that you know how to manage your money without taking too many risks and maximizing your profits at the same time.  Thanks for your thoughts Adrienne!

8 Comments »

  • Daniel said:

    "Always clear your debts before putting money into investments"

    Does this include student loans? If they're at 3.5%, should I be aggressively paying them off? Or contribution $5,000 to my Roth IRA? Or investing for the medium-term?

  • 20smoney (author) said:

    For me personally, I'd prob try and kill of my student loans fast after I have a least some savings for "emergencies". If you have a 401k where you can get company matching, i'd contribute as much as I can to get matching then everything else towards the loans.

    Getting rid of debt also comes with a psychological boost!

  • Daniel said:

    Really? After considering the tax effects of student loans, my effective interest rate is less than 2.5%. Even a very conservative portfolio would allow me to earn a better interest rate. Knowing that I'll come out ahead by investing money appeals to me, and putting a steady amount of money in investments may be good for me vs. waiting 5 years.

  • 20smoney (author) said:

    I know what you're saying and you're right. I used to think the exact same way but I've slightly changes my views just in the case that I like to eliminate debts and gain assets. Sure you are probably fine since the rate is so low.

  • Economiser said:

    Thanks for running this blog. It's a good idea to direct financial advice to people in their 20s. I wish I had started getting involved a little bit younger (now I'm late-20s).

    Anyway, just wanted to chime in to say that I agree with Daniel. I'm retaining student loans at interest rates between 2.5% and 5% despite having the cash flow to pre-pay much of the principal. My rationale is that at these low interest rates I'd rather have investable capital, and that over the long term I think I can beat those rates of return. Also, you can't claw back money you use to pre-pay loans, so it's nice to have a cash buffer in case of job loss or unforeseen expenses.

  • Daniel said:

    Thanks. I'm still learning, but I appreciate the advice. I never thought about the emergency situation, and while I hope I won't have to worry about it, it's something to think about. I don't like the idea of having debt hanging over my head for longer, but as long as I'm beating the rate, I can't complain. I think I'm going to start investing.

    Do you have any suggestions about where to invest? Sharebuilder? Anything with a bonus just sweetens the deal!