Learn to Invest Successfully

Learning to invest requires a knowledge of both investments and investing. You must first understand the nature of the investment options available to you. Then, you'll need to learn investing strategies that you can use in order to manage your investments successfully.

If you learn to invest as an informed investor, better long term returns are achievable at only a moderate level of risk. Huge losses of 40%, 50% or more can be avoided even in times of financial crisis and a stock market crash.

We will use Torie and her 401(k) plan as an example of how to invest. She is willing to accept a moderate or medium level of risk. Her plan offers 20 different investment options, varying in terms of safety vs. income vs. growth potential or higher returns.

Torie's first and most important investment/ investing decision is how to allocate her money across the various asset classes or investment choices available to her. In other words, where to invest money, and in what proportion or percentage is the question.

Since Torie already has a sizable amount of money in her 401(k) and is adding or contributing more each payday, she will need to make asset allocation decisions on two levels.

She decides to allocate the money in her existing portfolio so that 25% of it is very safe, 25% is relatively safe and pays a higher income, and 50% is invested at greater risk but offers the potential for higher returns. Then, to keep it simple, she decides that her future contributions from her paycheck will be allocated likewise: 25%, 25%, 50%.

Let's take a closer look at Torie's investment choices and her investing strategy.

Of her 20 investment options, two are safest: a stable value fund that pays interest, and a money market mutual fund that pays a dividend, interest, that varies with prevailing interest rates. Torie decides to allocate 25% of her portfolio assets and new contributions to the stable value fund, because it usually pays a higher rate than the money market fund. Thus, 25% of her assets will be invested safely.

Three of her options offer higher income in the form of dividends. These choices are riskier than the two above, but not as risky as stocks. Because they invest in either long-term or shorter-term bonds, these are called bond funds. Torie selects to have 25% of her existing portfolio, plus 25% of her future contributions to go to the intermediate-term bond fund. It offers relatively high dividends with only a moderate level of risk.

The other 15 choices are either stock funds, or hybrid stock funds that invest in stocks plus some bonds as well. These hybrids are called balanced funds. The stock (or equity) funds available to her range from aggressive growth funds to international stock funds to conservative stock funds to specialty stock funds.

Torie will have 50% of both her portfolio and her future contributions invested in stock funds, but she will mix it up so that she is diversified. Her largest holding will be a large diversified stock fund that invests primarily in stocks of major U.S. corporations. The remainder of her money earmarked for stocks will be divided between an international fund that invests in foreign stocks, and a specialty fund that invests in stock of companies in the real estate business.

Torie's asset allocation, or investment mix, will look like this:

*25% to the stable value account

*25% to the intermediate-term bond fund

*25% to a large equity-income fund

*15% to an international stock fund

*10% to a real estate stock fund

Her total adds up to 100%. All future contributions going into her 401(k) account will be invested based on these percentages unless she decides to change them. For example, as she ages she might want less going into stock funds.

Torie's portfolio will be invested based on these percentages also, at the time she instructs her plan to allocate her assets in this way. Over time, however, her portfolio allocation percentages will change as some of her investments perform better than others.

It is Torie's responsibility to assure that her portfolio allocation percentages do not get out of line. It is up to her to rebalance her portfolio periodically, like once a year. Whenever the 25%, 25%, 25%,15%, 10% targets change significantly, her attention is required.

Example: The stock market has been on a roll for three years and Torie's large equity-income fund is now 35% of her total portfolio value vs. the 25% target. Her stable value account now represents only 15% of the total vs. 25%. Torie needs to rebalance to get back to her targets by moving money from the stock fund to the stable account.

As Torie ages she will need to change her target percentages to make them more conservative. She will want less invested in stocks, and more in bonds and safer fixed investments when she retires.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.