by Edgar Frost

Created on: February 28, 2007   Last Updated: September 07, 2008

If you have just begun to invest in the stock market, or you would like to, you may be wondering where to start. If you are going to be handling your own investments, I would suggest buying an introductory guide to investing so that you aren't going in cold. I would also encourage you to think long and hard about your goals (short-term vs long-term), along with your risk tolerance.

If you need money in the short-term, to buy a home in a year or two for example, you should invest in low risk securities, since preserving your capital is probably very important. On the other hand, if your goal is to save for a retirement which may be 30 years away, some short-term ups and downs will likely even out over the long run. It's also important to remember two important points. First, don't put all your eggs in one basket. If you do, you're chances of becoming wealthy will probably be offset by your chances of going broke. Spread your money around. Logical asset allocation is important. Second, assess your risk tolerance. Stock prices can, and often do fluctuate widely. If one of your investments loses value initially, are you going to panic and sell?

Now let's get down to investing. Stocks are the cornerstone of a good investment portfolio. A basic rule of thumb is to deduct your age from one hundred and invest this percentage in stocks. For example, if you are 30 years old, 70% should be in stocks. Notice that with this formula, younger people would have a higher proportion of their money in stocks, while older investors would have less. This is to maximize growth when you are younger and minimize volatility as retirement approaches. If you have a higher risk tolerance, you may want to consider a slightly higher percentage in stocks.

For many investors, especially beginners, I would suggest investing in mutual funds. Mutual funds are essentially a basket of different stocks, sometimes hundreds, that are professionally managed. The great thing is that you're not putting all your eggs in one basket. Some individual companies will do well, and some poorly, but hopefully the strong performers will off-set the poor performers. One final note about funds: Research them carefully. Pay attention to the fees, and study the funds performance over the long haul. Try to look for funds that have been around a while (at least 10 years), so you can see how a fund performs over the long-term, and through various economic conditions. Also, stay away from the hot industry of the moment. If oil is trading at all-time highs, don't jump in at that point.

Once you have chosen some funds, look for some bond funds to help balance your risk, and consider investing a small percentage in certificates of deposit. At the time of this writing, it is fairly easy to find CD's which pay 5% or so. It's a nice safe alternative to balance out your portfolio.

Remember to assess your risk, spread out your assets, figure out your goals, and educate yourself by reading books and carefully following the financial news. There are no guarantees in the stock market, but following this advice will provide you with the best chance for success. Good luck in your future endeavors.

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