Learn the Investing Basics

This guide to the investing basics will take you through the process of planning an investment strategy and choosing an investment that works for you.

What is Investing?

1. To put money to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value. This is the most common meaning for investing, which is the one we are focusing on.

2. To use money in accumulating something. We can use money for millions of different things, but you are investing when you use it to accumulate goods, property, or assets.

3. To use, give, or devote (time, talent, etc.), as for a purpose or to achieve something. I like this definition best, because it implies that investing requires more than just money, it requires time, energy, discipline, patience, and commitment. Most importantly, investing requires a purpose.

You can invest in any number of things, for example: stocks, bonds, real estate, farm land, jewelry, industrial equipment, or even comic books. This website is an investment for me; it requires my time, energy, and a little money. But the most important part is that I’m investing my time, energy, and money for a purpose, in hope of achieving my own personal goals.

Good investing is about setting goals and working toward achieving those goals for a specific purpose. Most people know what bad investing is. For the most part, it involves losing a lot of money.

So How Do I Decide What To Invest In?

Take out a few blank sheets of paper (or even better, use the back of something you were going to throw away) and follow along with the following steps, in order.

Brainstorm:

Each idea should be a bit different from the others. Try to avoid writing down ten clichés that everyone has heard before. If you write down all ten ideas and find two similar ideas on your brainstorm page, choose the one that means the most to you.

These ideas can be anything you want; they could even be a specific investment that was successful for you in the past, or something you may want to invest in. The most important thing as a beginner is that each thing matters to you and has some meaning to your financial situation. These ideas are going to be your 10 investing basics guidelines. Once you have ten different things on your list that matter to you, move on to the planning stage.

Plan:

The most popular response I get with this one is, "I'm investing to make money!" Well, of course you are; but that is not an answer. Money is just a tool; it’s a way to get something else. It is very important that you understand this concept. All of the other steps in this strategy are useless if you can’t figure out why you are investing. I'm going to explain this in a bit more detail.

Let's say you invest for a few years and make a good amount of money. What are you going to do with all that money? Maybe buy a house, go back to school, put your kids through college, or even save it for retirement. That’s the “why”, the purpose you are looking for. Investing is a way to fulfill your purpose, but understanding your purpose is critical.

Make sure to refer back to your ten investing basics. Make sure each of your ideas from step 1 helps you to better understand why you are investing. If some of the guidelines are no longer relevant, cross them out and replace them with more useful ideas.

Don’t worry if it takes more time than you expect to figure out why you are investing, it is important not to rush this step.

Too many beginners jump into investing without any knowledge of the investing basics and without a clear idea of why they are doing it. Think about this: if I try to fly an airplane without any purpose or knowledge of how to do it, I will almost certainly fail. Now what if I don’t know to fly an airplane, but I have to land one to save my life? I would do whatever it takes to make it work.

Your purpose should make sense to you; you should be able to look at it and understand why this is important to you. Since this is an investing basics strategy, your purpose should one simple idea (no more than one sentence). Having a clear purpose can help a lot when things get difficult. Once you have a purpose that makes sense to you, write it at the top of your paper.

Set Goals:

Who is affected by your investment decisions? Are you going to include those people in your decision making process? Are you going to go to someone for investment advice?

What do you plan to do to achieve each goal? Is each goal reasonable? What type of impact does each goal have? Is each goal significant?

Where does your investment plan fit into your finances? How does each goal affect your time schedule, income, savings, and your budget?

When would you like to achieve your most important goals? What is a (reasonable) time frame do you expect to achieve your ultimate goal? How much time can you devote to your investments? How often do you plan on checking your investments?

Why is each goal critical to your purpose? Why is each goal important to you?

Most importantly, how does each goal help you achieve your purpose? Ask this question for each goal you write down and make sure the answer makes sense to you. If you are struggling with setting goals, make sure to talk to others and get their opinions. You may want to spend some time thinking about what you’d like to achieve and come back to your purpose later to see if each goal fits.

It is smart to include your spouse or significant other when setting goals if your decisions affect them and they are willing to provide you with feedback. Have that person go through the same process. Compare their investing basics with your own to help you both set common goals.

When you have about three to five significant goals that fit with your purpose, it’s time to review the strategy you’ve put together so far.

Review:

Remember, nothing is written in stone at this point. If you don’t feel comfortable with your reasoning or if a few ideas don’t fit, go back through the first three steps. Set your notes aside and take out a new sheet of paper, going through the brainstorm, planning, and goal setting steps.

One tool you can use when evaluating your basic strategy is to consider each separate element and ask, “Why is this important to my purpose?” If you have kids, this line of questioning is fairly easy to understand; you simply try re-asking yourself "why" you have written down an idea over and over until you understand it. For example, I can evaluate my strategy by looking at my idea of saving 10% of my annual income. By asking, “Why is it important to save 10% of my income?” the answers to each lead me to my overall purpose of having the freedom and option to retire at some point in the future.

If there are any flaws in your logic, they will show up when you try to review your conclusions and explain your goals to yourself and others. Don’t be afraid to start over from the beginning and refine each one of your ideas. Once you are confident that you have between three to five goals that will help you achieve your purpose, it is time to use ALL of your information to decide which investments fit into your strategy.

Decide:

Imagine that a friend asks you to consider investing in their new business. Which would you prefer?

If you prefer owning a portion of their company, consider investing in stock mutual funds. These funds invest directly in stocks that represent ownership equity of corporations.

If you prefer loaning money to someone, consider investing in bond mutual funds. These funds invest in debt securities of corporations.

If you would rather invest in a government rather than a company, than you may want to look at a government securities fund. These funds invest in different types of government securities like treasury notes, bonds, bills, and government backed bonds.

If you don’t like any of those options, you may want to consider specialty funds which invest in other things like foreign currencies, commodities (such as gold or precious metals), or real estate.

Much of the information on this site is here to help you decide

Why is an Investment Strategy Important?

It always helps to discuss the investment basics with people you know who are familiar with investing. If you choose to speak to a financial advisor or a broker, you can use your strategy to help evaluate their advice. Remember, the more thought you put into your investment strategy; the more you will get out of it later.

I’ve seen many people feel scared, helpless, and frustrated about their investments. The majority of them admit that they wish they had done more planning beforehand and learned more about the investing basics before they invested their money. These are people who are trying to retire or put their kids through college. Imagine their dismay when they find out their were hopes and dreams are crushed because they didn’t understand what they were investing in. By doing your planning in advance, you can avoid frustration, set reasonable expectations for yourself, and develop a positive mindset toward investing.

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