Here are three tasks you can do this month to become your own financial planner—whether or not you decide to seek help from a professional.
- Learn About Mutual Funds
Mutual funds are pools of money managed by investment companies. You buy shares in the fund and the fund in turn buys a wide variety of stocks and/or other investments. Funds let you diversify among far more investments with a small amount of money than you could ever do by investing yourself. Index funds invest in a stock or bond index such as the Standard & Poor's 500. Your investment rises and falls with the index itself. Actively managed funds are run by a portfolio manager who chooses stocks or bonds. You can research specific funds on Morningstar.com.
Here's what to look for:
- Who is the manager and what is his or her track record? You want someone whose performance has been in the top 25 percent of their fund category and preferably a manager who has been in the business for years.
- The cost. Look at the expense ratio. This is the percentage fee the investment firm takes from your portfolio to spend on running the fund. A large company stock fund shouldn't charge more than 1 percent. Index fund fees are the lowest cost funds because they are not actively managed.
- Does the fund fit my investing needs? Be sure to look at the fund's portfolio holdings to make sure it is invested in the kinds of stocks and bonds you've determined are right for you.
- Learn How to Pick a Stock
Despite its dramatic short-term ups and downs, historically the stock market consistently delivers better long-term returns than any other investment. Investing in a handful of individual stocks, however, can be far riskier.
Here's what to look for in company financial statements and websites such as Hoovers.com for stock research:
- Who's running the company? You want a stable management team with experience and good track records in the industry. In addition, Wall Street should have confidence in their abilities.
- How's business? Determine what position a company your interested in occupies within its industry and how does the future look for that industry overall. You can be confident investing in a company with a winning product, particularly if it's a leader in its industry and there are barriers preventing competitors from challenging it.
- What is the price/earnings ratio? The price to earnings ratio, better known as a stock's P/E, measures the ratio of a stock's current price to its earnings. P/Es are mostly used to compare similar stocks: one healthcare stock to another, for example. Or you can compare a single stock's P/E to the average P/E of its group or use the Standard & Poor's 500 average P/E as a gauge. Stocks with P/Es significantly higher than their industry average or stock market as a whole are considered pricey. A high P/E can be, but isn't always, an indication that the stock is trading at its high and does not have much more room for growth.
- Learn the Basics on Bonds
Basically a bond is an IOU. The government or corporations take your investment and pay regular interest payments to you. Bonds and bond funds can help you diversify your portfolio. In years when the stock market doesn't do well, a bond portfolio can temper your overall losses.
Here's a look at some of the different types of bonds (and bond mutual funds):
How much do you need to save for retirement?
- Treasuries. These are issued with the full faith and credit of the U.S. government. They have no credit risk at all, but as a result, they pay low interest rates.
- Tax-free Municipals. These are issued by local authorities around the country. The federal government doesn't tax income from these bonds. And if you buy bonds issued by your own state, you won't pay state taxes either. Munis are not all of similar quality and credit risk. You have to look carefully at the financial health of the issuer.
- Corporates. Companies issue bonds to foot the bill for expansions, acquisitions, etc. These are riskier than Treasuries but the rates can be 1 percent to 4 percent higher. Again, you need to look at the credit risk associated with the issuer.