Questions Consider Before Investing

3 Questions to Carefully Consider Before Investing

Before investing in mutual funds, stocks, bonds, real estate, commodities, or anything else, it’s important that you’ve carefully considered the following 3 questions.

  1. Do you have the means to invest?
  2. Do you truly have a willingness to invest?
  3. Do you really know how to invest wisely and effectively?

If you don’t have a satisfactory answer for each of these questions then I recommend taking a step back and addressing them one by one until you do.

Question #1 – Do you have the means to invest?

While you might feel the need or desire to begin investing right away for a variety of reasons, you should first assess whether you even have the means to invest in the first place.  For example, does it make sense to invest if you’re already struggling to put food on the table, pay your mortgage or rent, or to meet other basic financial obligations?  Likewise, what’s the point of investing if you don’t have enough money left to cover foreseeable medium-term expenses such as home and car repairs, holiday spending, vacations and so forth without turning to a credit card or other expensive forms of borrowing?

The point I’m trying to make is that there’s a logical progression to establishing yourself financially.  You first need to make sure that you’re on solid financial footing with respect to your day-to-day and medium-term expenses, and then you’re in a position to build up investments to meet longer-term needs (retirement) and to achieve your goals and dreams (starting a business, traveling, etc.).

Question #2 – Do you truly have a willingness to invest?

Let’s now assume that you have some extra money that you could invest.  The question then becomes whether you’re actually willing to invest it.  That’s a very important consideration because, by definition, investing means giving up some of your money now in order to have even more later.  While that may sound great in theory, if you’ve been struggling financially for a long time it can be difficult not to want to spend extra money as soon as you finally get some.

So are you irresponsible if you spend some of your hard earned money as you earn it on things that you want?  Of course not.  While it would be unwise to spend all of your extra money, it’s often best to take a balanced approach towards investing.  More specifically, if you invest every penny in the future while never doing anything you want in the present then there is a danger that day-to-day life could come to feel like a grind, causing your investment discipline to eventually break down.  As a result, it’s generally more sustainable and productive to have a goal to invest some of your extra money, thus enabling you to not only meet your present needs, but some of your reasonable wants as well.

The point here is that you can’t reasonably expect your investments to be successful if you’re going to raid them every time you need or want something.  Remember, investing means giving up some of your money now in order to have even more later.  At a practical level that means whether you have a little or a lot to invest, you’ll increase your chances of success if you’re willing to commit to your investments for a long period of time (with at least 5 years being the rule of thumb).

Question #3 – Do you know how to invest wisely and effectively?

Once you have both the means and the willingness to invest, you need to know how to do so wisely and effectively.  In other words, do you really know what you’re doing?  You’ll need to refer to other articles for the “how’s” of investing, but for now it’s enough to say that when selecting investments you should follow these 3 principles.

  1. Follow sound investment practices (focus on long-terms plans as opposed to chasing get-rich-quick schemes).
  2. Take the long view; if your money is invested wisely according to a sound plan then you don’t need to panic at the first sign of trouble.
  3. Don’t ever invest in something that you don’t understand.
What Are Index Funds - Index Funds Vs Mutual Funds

What Are Index Funds? Index Funds Vs. Mutual Funds

You may consider them boring, but index funds are low-cost, low-maintenance funds designed to grow wealth at a slow and steady pace.

An index fund is a type of mutual fund that tracks the price fluctuations of larger indexes such as the Dow Jones Industrial Average and the S&P 500.

Putting your money in an index fund is a type of passive investing.

This means the investor will purchase an index fund with the intention of long-term growth and minimal portfolio maintenance.

With index funds, you get broad market exposure and low operating expenses accompanied by lower-than-average risk. You can, however, choose a high risk index fund if that fits your financial strategy.

Is your head hurting yet?

Let’s take a look at the difference between index funds and mutual funds.

Index Funds vs. Mutual Funds

Yes, an index fund is a type of mutual fund, but not every mutual fund is an index fund. Here are some details. Ordinary mutual funds are actively maintained by professional money managers. When you buy stock in a mutual fund, your money gets pooled together with everyone else that bought that same mutual fund.

Money managers assigned to your mutual fund actively buy and sell securities in an attempt to produce capital gains and income for the investors. This is considered active management because there is a person (the money manager) constantly deciding how to manage the portfolio, what to buy, and what to sell.

Index funds are like mutual funds because the investor buys a small slice of many different stocks. However, index funds are different from mutual funds because index funds try to replicate the index your fund is tracking instead of trading securities.

Many index funds rely on a computer simulated investment model with little or no human input when deciding which securities to purchase. This passive management style is the leading factor in decreasing the maintenance fees of index funds.

Don’t let the absence of a constant money manager scare you away from index funds. Remember that index funds are supposed to be a more simple form of mutual fund investing. Index funds track market performance and attempt to mirror its ebb and flow.

Are Index Funds Perfect?

No, index funds are not perfect. You’ll find no guarantees when it comes to any sort of stock market trading.

Here are some index fund pros and cons:

Pros

  • Low costs for the consumer (you). It costs less to run an index fund because there are no highly-paid stock market analysts frequently trading securities.
  • Simplicity. The objectives of index funds are relatively easy to understand. Pick a fund that targets an index you prefer and stick with it.
  • Diversity. With your money in an index fund, your portfolio can achieve the accumulated benefit of hundreds of different stocks. Another benefit is that broad indexes almost always recover from downturns.
  • Tax efficiency. Since index funds don’t trade much throughout the year, investors usually don’t have to pay much in capital gains taxes.

Cons

  • Tracking errors. By its nature, mirroring the index cannot be 100% accurate. The difference between actual index performance and the index fund is known as “tracking error”. It can create an unexpected profit or loss (and the con is the loss, obviously).
  • Will not outperform. An index fund attempts to match the index it is tracking, and by design, even the best index funds cannot outperform their actual index.
  • Boring. For some people, a slow and steady pace isn’t fast and exciting enough; even when they’re making money.

What To Do

Look long enough and you will be able to find qualified professionals telling you to only trade in index funds, or keep away from them altogether. What you need to do is educate yourself about index funds. Become saturated with stock market education and the different types of investment opportunities. Research as much as possible and invest in the stock market in whatever way best fits your financial goals and your lifestyle.

Best Brokerage Firms

Best Brokerage Firms

Best Online Stock Broker Comparison for Do-It-Yourself Investing

The internet has changed the game for stock trading, as it is now possible for the casual investor to trade stocks without the need for a personal stock broker. Do-it-yourself investing is here to stay. The problem is wading through the many discount online stock brokers to find the best. While the long-established and well-respected online brokers still tend to put up the top deals, there are so many new start-ups that the dizzying array can seem confusing to new investors.

Though do-it-yourself investing has only been around for about a decade, the progress of the industry has brought about easier and cheaper options for you as an investor-which is certainly a rare and welcome combination. However, despite the claims of each site, not all of them offer the promised inexpensive trading, professional and knowledgeable customer service, quick execution, and top-of-the-line technology. Let’s compare 9 that are worth your time and hard-earned dollars.

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Best brokerage firms, brokerage firms, Investing for beginners, discount brokerage firms, Fidelity brokerage, e-trade brokerage

Overview Of Brokerage Companies

Brokerage Firm Commission
/Fees
Minimum $ Ideal For Features
Fidelity $4.95 $0 Investors - Quality research, tools, & commission free funds
Charles Schwab $4.95 $0 Retirement - Commission free ETFs, educational content, & customer support
Merrill Edge $6.95 $0 Passive Investors - Linking of Bank of America accounts, & lots of in-depth research
TD Ameritrade $6.95 $0 Active Traders - Quality research, tools, & customer service
E*TRADE $6.95 $500 Active Traders - Comprehensive selection of power trading platforms & investment options
Ally Invest $4.95 $0 Passive Investors - Linking Ally Banking accounts, & low commissions
Vanguard $7.00 $3,000 Retirement - Commission free ETFs & Mutual Funds
TradeStation $5.00 $500 Active Traders - High-quality advanced trading platforms
Interactive Brokers $1.00 $10,000 Active Traders - Low commission cost, advanced tools, international trading

 

Fidelity Brokerage Company

Fidelity

With Fidelity being a household name, this is not exactly your typical online stock broker, although the power of the Fidelity name brand is helping this site to join the ranks of other discount brokers. Trades cost an $8 commission, and you do need to be wary of possible fees for acct maintenance. However, the $4.95 is a flat rate that includes market, broker-assisted, and option trades. If you require assistance you will not be facing an extra charge. While Fidelity offers chat (live), it is not available 24/7. The tel-support (which I have personally tried) is quite fast, easy to use, and free. Because they offer many webinars and have compatibility with most mobile devices, Fidelity is an excellent place for beginning investors.

TD Ameritrade Online Brokerage Frim

TD Ameritrade

 After its recent acquisition of high-powered trading site such as Scottrade, thinking's, TD Ameritrade has moved to the front of the line among online brokers. TD Ameritrade has an appealing mix of research tools, low-cost trading, mutual fund options, and fast customer service. thinkorswim makes the choice a no-brainier for serious traders. Not for nothing did Barron’s rank TD Ameritrde as the #1 best online broker in 2011 and 2010 with four and a half stars. Stock trades cost a flat fee of $6.95 each, although there are many pricing systems for the trading of options. Each options trader will want to review these different price levels to find what will work best for him. Like other sites, thinkorswim does offer account transfer fee reimbursement for new members-as much as $100. New members also get a 30-day trial period where there is no consequence for terminating service. In addition, make 40 or more trades per month, and thinkorswim will actually pay for your internet connection. Three free trades (mutual funds) each month are a part of your membership, and their IRAs have no associated fees. As if all that were not enough, you will also receive a plush thinkorswim monkey when you sign up.

Online Brokerage Frim ETrade

E*TRADE

We’re all familiar with the E*Trade television commercials featuring the talking baby, so this online broker has the most name recognition of any on this list. Being well known does have a price, and at $6.95 for each trade and they then charge you $45 for broker assistance on each trade, E*Trade ranks as one of the most costly trading sites out there. The site recognizes their costs, however, and offers free trades (with certain restrictions) within the 1st sixty days of account opening. E*Trade has an account minimum balance of $1,000, and there are both inactivity and maintenance fees. Keeping one’s account in active status is important. Before you decide that E*Trade is too rich for your blood, remember that E*Trade’s platform and technology are second to none-so experienced investors will find that this site is the best option. The armchair investor, however, will probably find that the fees and cost for each trade are too high to effectively utilize this site.

Ally Invest Online Brokerage Frim

Ally Invest

Since it is consistently good at everything it does, Ally Invest is a great middle-of-the-road option.  Ally Invest only charges a $4.95 per trade commission, and this cost won’t change even if you take advantage of the opportunity to consult with a broker by way of phone. $4.95 will also pay for options trading, although there is an additional 65 cent charge for every contract. Readers of Barron’s, SmartMoney and other publications that rank online stock traders may already know Ally Invest’s name, as they consistently win awards for all that they do. With customer support offered for extended hours (although not twenty-four/seven), and with a policy that reimburses $150 dollars worth of your transfer costs if you choose to transfer a current account, Ally Invest is definitely user-friendly. The greatest asset Ally Invest offers is its stance on educating customers-this means there are many resources available for amateur through professional investors.