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Saving is Priority One, But Investing is Everything Thereafter

5 January 2011 - News - Tom Cleveland

The past two years have been some of the severest on record when it comes to measuring how tough economic times can affect a family’s financial well being, much less the nation as a whole. Budgeting and priority setting become tougher elements of a prudent financial plan, but short-term thriftiness can bode well for long-term financial security, as long as you stick to your plan.

Priority one of anyone’s plan must always be to accumulate savings. After an emergency fund of 3 to 6 months is established, then the next priority, developing an appropriate investment strategy, begins to drive the process to ultimate financial security. Investing is all about managing risk and your tolerance of it. If you are losing sleep at night over your investment strategy, then perhaps, it is time to moderate the level of risk in your investment portfolio.

Investing is like any other performance-driven activity in life. It is best to accept your "amateur" status at the beginning and learn from a mentor. Warren Buffett, one of the world’s richest men and wisest investors, once wrote that you did not have to possess a stratospheric IQ, unusual business insights, or inside information to invest successfully. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.

A "sound intellectual framework" is based on knowledge and experience, but the last factor has more to do with your individual personality than anything else. Before you select a broker or seek advice from an investment advisor, you need to familiarize yourself with basic investment terms and determine what style of investing best fits your personality type.

Investors typically fall into two distinct categories: the ones that prefer to research and study their options, then invest for the long term (a "buy and hold" strategy), or the ones who prefer to enter and exit the market frequently, profiting from short-term opportunities presented to them by the volatility in the market (an "active trading" strategy).

Each of these investing styles can be applied to various investment vehicles in the marketplace to achieve your individual investment objectives. You may elect to choose your own investment vehicles or you may employ an advisor, but a good rule of thumb is to never invest in anything that you do not understand. "If you can't explain it simply, then you don’t understand it," was straightforward advice once given by none other than Albert Einstein.

Every investment vehicle offers a potential return and involves some degree of risk. Investing starts by understanding the risk involved in a particular investment vehicle before it is ever bought on the open market. Measuring and managing risk become second nature to a prudent investor.

Stocks, bonds and treasuries are the more traditional items preferred by investors. Investment holding periods tend to be long and favor the "buy and hold" investor. However, short-term traders also trade these instruments for quick gains, using technical analysis to guide their disciplined approach to the market.

Retail forex trading has recently received global popularity among investors the world over due to its flexibility and ease of access on the Internet to modern trading software platforms. A forex broker is used to gain access to the market. Specialized training is a prerequisite as forex trading does involve a high degree of risk, but trading time horizons can vary from minutes to days, and even months when longer-term carry trade strategies are employed. Once again, success is tied to knowledge, experience and the ability to control one’s emotions. Time spent on a demo account will tell you if you are cut out for this investing regimen, cause everyone isn't.

Financial security is not a matter of luck, but it can be the result of careful financial planning, saving, and a prudent investment strategy, developed to suit your own unique personality style and investment time horizon. It is best to seek help if the topic seems overwhelming, but as you accumulate knowledge about investing, the terms and strategies will become familiar to you over time, and your confidence will grow accordingly. It is often said that investing is 95% anticipation, and that statement alone suggests that preparation and planning are keys to success.

Article written by Tom Cleveland

The views expressed in this article are those of the author and not of StockMarkets.com

 


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