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Investing 101

You may be graduating from college, starting your first job or developing a new interest in your finances. And you may be feeling like the lessons about money you learned growing up weren’t quite enough to prepare you to be an effective money manager as an adult. The good news is, it’s never too late to learn money management basics and create the foundation for your financial future.

Understand Investing Basics.

Learning about the most critical aspects of investing – risk, asset allocation and diversification – will create the foundation of your financial knowledge.

  • Risk. The first step is to learn about the different types of risk associated with each type of investment. Generally, the greater the risk, the greater the potential for reward. It’s important to understand this risk-versus-reward relationship and to identify the amount of risk that’s comfortable for you. That will help you choose investments that are appropriate for your goals, investing time frame and comfort with risk.
  • Asset Allocation. Asset allocation has a lot to do with your portfolio’s return. Asset allocation refers to how assets are distributed across different asset classes (stocks, bonds, and cash). Generally, if you have a long investing timeframe, you can allocate larger amounts of your portfolio in more aggressive investments, such as stock mutual funds, and allocating smaller portions to less risky investments, such as money market or bond funds, to preserve wealth. Some mutual fund companies offer balanced or asset allocation investments that provide exposure to multiple asset classes. These can be a great choice for investors who don’t want to manage asset allocation on their own.
  • Diversification. Spreading assets among different investment styles, asset classes and stocks of companies of different sizes is a time-tested way to balance risk and return. That’s because one investment type may be in favor when another isn’t doing as well. Some mutual funds, such as asset allocation funds and funds of funds, offer exposure to different asset classes in a single investment. Remember, however, that diversification alone does not ensure against loss.

Getting an early start can make a huge difference in your long-term success. If you’re just starting your career, retirement might be the furthest thing from your mind. But opening an IRA and/or participating in your company’s retirement program will not only help you put your money to work for you right from the start – it also will provide you with hands-on opportunities to learn about different types of investments.

Seek Educational Resources

Take advantage of the financial education materials available to you. Your local library and bookstore are great sources of educational materials, and the Internet is packed with helpful and often free information. Check out financial education websites such as investopedia.com, nefe.org/pages/edu, financial-education-icfe.org and federalreserveeducation.org for a quick read. Reputable financial publications, such as Barron’s or The Wall Street Journal, also are a rich source of information about investing.

In addition, American Century offers a wealth of educational resources at no charge. The information is designed to help individuals understand the often complex world of finances and is presented in simple, objective language that’s clear and understandable even for beginners. Resources include booklets on key investing goals and one-page updates on topics ranging from diversification strategies to retirement investing. You’ll also find information about different account types and how to use them, from IRAs to 529 College Savings Plans. The materials are available in the Education & Planning section at americancentury.com. To order, click on any of the investing topics, then on Order by Mail for a listing.

Create an Investment Plan

Once you understand the basics, you’re ready to begin building a sound financial plan that fits your goals, investing time frame and comfort with risk.

  • Create your emergency account. Your first step is to make sure you are prepared for financial emergencies by setting aside money you can use for the unexpected. Your emergency account should be large enough that you don’t need to borrow money or rely on a credit card to cover unplanned expenses. A good rule of thumb is to set aside enough money to cover at least three to six months of your living expenses. Add up your fixed expenses (rent, car payment, utilities, etc.) and your variable expenses (entertainment, personal care, vacations). Subtract the total of your expenses from your total income, and use any remaining money to begin building your emergency account.
  • Set goals. Begin by working to identify goals, including short-term goals such as building an emergency account and creating a budget, and longer-term goals such as paying off school loans, buying a car or saving for a down payment on a house. Identify a specific dollar amount for each goal and think about how long it may take to reach it. By gaining a clear view of what you want to accomplish, you can begin to build a plan to reach those goals.
  • Select appropriate investments. You can easily match mutual funds to your specific goals. When you invest in a mutual fund, your money is pooled with other investors’ money. Professional fund mangers invest the money in a wide range of investments. Each fund has specific investment objectives, which can range from long-term growth to current income. Understanding these objectives can help you select funds that match your goals.
  • Manage your plan. One way to stay on track toward your goals is to invest regularly. Investing a specific dollar amount, such as through an automatic investment plan, means that you invest not only when markets are rising but also during downturns. As a result, you buy more shares when the price is lower and fewer when it is high, which reduces your average cost per share.

Consult an Investment Professional.

Professional advice can help to reinforce the financial lessons you’re learning. Consider working with a tax expert or financial advisor to identify choices that are right for you. At the same time, it’s important to note that advice is seldom free, and there’s lots of it out there. Proceed with caution and make sure you understand the fees and expenses associated with advisors and each potential investment.

This information is for educational purposes only and is not intended as investment advice.

American Century Investment Services, Inc., Distributor

©2006 American Century Proprietary Holdings, Inc. All rights reserved.

The American Century Investments logo, American Century and American Century Investments are service marks of American Century Proprietary Holdings, Inc.

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One Response to Investing 101

  1. Enton says:

    hey very useful information

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