Six Steps to Successful Investing

The real thing with six or seven or more steps to successful investing is that every magazine, talk show host, TV personality and internet site that even remotely addresses investing have their own list of "must do" steps. There are many lists of steps that have essentially the same advice but there are some esoteric "steps" out there that are worth studying and making a part of your investing habits.

Successful investing activity is not a happenstance occurrence; it is the well executed actions proceeding from a well thought out plan. The process of investing must follow a logical progression of steps that lead you to (and through) specific bench marks to a final goal. Successful investment plans will take into account the necessity of maintaining adequate reserve funds, the impact of taxes, your age and position in the life cycle, and it will be responsive to the vagaries of the economic environment.

Inexperienced investors sometimes try to manage their activities in a purely intuitive way. The problem with intuition is that the specific steps that build a solid financial framework can be overlooked. Intuition can be a helpful ingredient in the dream building process because it helps steer you away from things you do not like and toward things you do like. The logical approach to successful investing begins at the place where dreams begin to give way to establishing a set of solid financial goals. When you begin to develop a picture of your fully realized financial goals it is time to learn how to execute a successful investment program that will take you to your individual financial objective.

Step one in the process is making certain that all your current needs are taken care of. If you are not budgeting you cannot know what you need and what you have left to invest. The "current needs" for modern investors is a list of budget items that cannot be dismissed and includes housing, food, transportation, taxes, clothing, medical care and protection against the risk of disaster, liability and disability (insurance).

The way to achieving step one in successful investing is to learn to budget and to study the advice of personal finance trainers such as the advice found at http://personalfinancetrainer.com/5/five-investment-prerequisites-to-p2p-lending/ .

When you have taken care of current budget needs, purchased the appropriate insurance for your needs, provided a retirement plan for your senior years and built a cash reserve that will pay for these needs for at least a year in the event of a loss of current income, you are ready to go on to step two.

Step two in the successful investing plan is to actually establish your personal financial goals. These goals will be a little different for each individual but will have some things in common.

Retirement is big. Most people list retirement security as a number one reason for investing. People who invest generally do not think social security will be adequate for their retirement and so will make accumulating retirement funds a first priority in their investment plans. Clearly a successful investing strategy needs to be based on your age, station in life and earning capacity in order to make the retirement part of the plan work. Study the information at http://moneycentral.msn.com/content/Retirementandwills/Createaplan/P142702.asp and at http://bulletin.aarp.org/yourmoney/retirement/articles/crunching_the_numbers_how_much_do_you_need_to_retire_.html to get a bit of an idea about how much of your income should be budgeted for retirement investing. I consider retirement investing to be beyond the common sense establishment of the retirement accounts available through some employers. Remember that investing is like gambling, there are risks involved. So while your 401K is doing what it is supposed to do it makes sense to use some separate funds for investing in a vehicle that may be riskier but may also give a much higher return.

Increasing present income is an investment goal that people consider along with retirement security. When you invest in high grade bonds and collect interest on the funds it is referred to as coupon clipping. Today there are funds that combine stocks and bonds for a moderate allocation of interest on a monthly income basis. See http://www.thestreet.com/story/10451875/coupon-clipper-funds-emerge.html for a discussion of how this works in today's market.

Young families often deposit money in special accounts to save for major expenses they know will be part of their life and growth. Some families put the money into savings accounts while other families use an investment vehicle such as a 529 education fund. (http://www.savingforcollege.com/intro_to_529s/what-is-a-529-plan.php ) The investments for education, down payment on a home, or capital to start a business should never be placed in jeopardy so special care should be taken if the accumulated funds are invested. While invested funds can grow much faster than simple savings accounts they are clearly riskier.

Establishing successful investment goals must take into account the federal income tax laws. Income tax laws allow some noncash charges to be deducted. The deductions can only be used with specific sources of income and the investor should seek the advice of a qualified tax advisor. When you can avoid or defer paying taxes on investment income you will have more funds left for reinvestment.

Step Three in successful investing is the investment plan. Make a written document telling how your money will actually be invested. This document will contain a specific target date for reaching all the interim investment goals. Every long term investment goal should have a series of supporting investment goals that' as they are successfully reached' will solidify the viability of the terminal goal. The investment plan will also specify the amount of tolerable risk. As each supporting goal is reached the investment strategy and individual vehicles should be reexamined to make sure tolerable risk is not being breached.

The prevailing wisdom is that the most important financial objectives should be paired with the least amount of risk. The financial objective should be clearly stated. The plan for achieving the goal should leave very little to the imagination. For instance if you plan a long term goal of acquiring $100,000 cash in ten years the investment plan document should spell out how that will be accomplished. Example: Goal - accumulate $100,000 cash by (date) from investments in a portfolio evenly divided between mid risk level stocks and low risk instruments which cumulatively provide a return of 10% per year.

Get really specific with your statement of investment goals. The more detail you include in the statement of your investment goals the easier it becomes for you to establish a plan in line with your personal investment goals.

Step four in successful investing is to evaluate the different investment vehicles available to you. You need to learn how to assess each investment opportunity for its potential risk and expected return.

This step is critical for successful investing. If you have not mastered this step there is little point in making unfounded guesses. Although there is no guarantee of future results for any investment there is improved probability of success if the value of the vehicle is properly assessed. Use the tools and articles on this site http://www.morningstar.com to increase your knowledge and confidence in learning how to evaluate the variety of listings available to you.

A trilogy of articles on assessing different aspects of a specific security can be found at the sites linked below.

http://www.associatedcontent.com/article/47288/security_analysis_part_1_economic_assessment.html?cat=3

http://www.associatedcontent.com/article/47343/security_analysis_part_2_industry_analysis.html?cat=3

http://www.associatedcontent.com/article/47526/security_analysis_part_3_fundamental.html?cat=3

Remember that in addition to the calculated risk and the expected return information you will need to factor in other considerations before making your decision. Consider the individual components of a portfolio and the portfolio as a whole, carefully weigh the tax obligations of any expected dividends, measure the liquidity of the investment against your probable and possible needs.

Step five in successful investing involves building a diversified portfolio. You will have laid the ground work for the construct of a solidly performing portfolio if you have worked the first four steps of the successful investing plan carefully and in depth. At this point you should have a basic portfolio that optimizes return risk ratios and investment values. The projections for your portfolio should address one or more of your financial goals. A balanced portfolio ought to have some common stock, government bonds and short-term investments. A diversified portfolio takes that balance and moves into a number of different investment vehicles in different sectors in order to increase returns on your investment and to decrease the amount of risk you are exposed to.

Step six in successful investing is the ongoing management of your portfolio. You cannot expect to just buy and forget. Monitoring your investments gives you the chance to carefully weigh your progress against your goals. This is where it all comes together. Revisit your written financial plan and measure the progress of the actual behaviors of your investment picks alongside your benchmark objectives. Restructuring your portfolio to increase expected returns or decrease unacceptable risk will mean selling certain investments and using the income to acquire alternative vehicles to bring your portfolio in line with your goals.

Successful investing does not just happen. Savvy investors do their homework and continue to learn the intricacies of the market and how to refine their calculations.

So having done all the correct steps how do you compensate for a market decline that devastates your investment accounts? There are steps to take to rebuild. In this case five steps recommended by Kiplinger's fall 2009 Personal Finance periodical. In an article by Mary Beth Franklin the advice is to do the hard stuff.

First put the 401(k) contributions on a weight gain diet. Contribute the maximum amount possible and put the contributions on auto deposit so it actually gets done on a regular and reliable basis.

Second do what ever "catching up" contributions you can manage to accomplish with your accounts this year. You can contribute up to $5,500 to a 401(k) in 2009.

Third protect your retirement accounts from current cash flow issues. Bluntly put this means do not raid the accounts for stuff you "want" right now. Loss of the compounding benefits coupled with the tax and penalties in some cases can be as much as 40% and is not sustainable. Remember your end financial goals.

Fourth, do what ever it takes to stuff your little piggy and plan to work a few years longer or develop a second stream of income. This may mean some work from home, home business, second job or other endeavor.

Fifth is advice for those who are already retired. Take less out in annual withdrawals until the market rebounds. This is truly hard at a time when prices are going up and your money values are going down but is a key factor in keeping what you have safe.