Happy 'Worldwide Invest Better Day' from The Motley Fool!
WASHINGTON, DC -- The Motley Fool has been helping ordinary people become better investors for nearly two decades. We've looked at several different aspects of investing, ranging from making your cash work harder for you to getting acquainted with some of the stocks and funds that give you lucrative opportunities to profit in the long run.
Yet when you take a step back from all those specific investments, you need a unified financial strategy to guide you in choosing among them and allocating your money appropriately. Although experienced investors often follow complex strategies, starting out simple is always helpful. So with that in mind, here's a five-step plan you can follow to get your finances in order and get on the road to prosperity and financial security.
Step 1: Get out of the red
Lots of beginning investors often want to dive into stocks right away. But if you've got balances on high-interest credit cards or other costly debt, use most of your spare cash to get it paid down.
Granted, there are occasions when it would be smarter to invest than to pay off debt. For instance, credit-card-issuing banks JPMorgan Chase (NYSE: JPM.US), Citigroup (NYSE: C.US) and Bank of America (NYSE: BAC.US) have all posted returns in the 25% to 40% range in the past year, beating all but the costliest of credit card rates. But usually, you'll end up better off saving yourself interest charges of 15% to 20% or more.
Step 2: Build a cash cushion
Even once you're out of debt, you want to make sure you stay that way. Having an emergency fund to cover unexpected expenses is a big step toward protecting yourself from a financial catastrophe that can undo all your progress in fighting your debt. Most experts advise three to six months' worth of expenses to help you weather a layoff, but even having just a couple of hundred pounds can prevent you from having to go back into debt to cover a car repair or a broken water pipe.
Step 3: Take the free money
Once you're ready to invest, make investments where you'll get some extra help. With an employer-sponsored retirement plan, your employer may match your savings with extra money, so make sure you take advantage of it. A personal-pension scheme offered by employers is currently being rolled out across the UK...
Step 4: Build a core portfolio
Some investors feel comfortable starting with individual stocks and never look back. But for most beginners, mutual funds and ETFs are an easier, less scary place to start.
In particular, low-cost index funds and ETFs make it simple to get broad market exposure in a variety of different types of investments. Target retirement funds even combine different investments in a single fund, automatically changing their allocation among stocks, bonds and cash as you get older to make their overall portfolio more conservative. Whether you go that route or choose to build your own mix of funds and ETFs, following simple asset allocation methods to build a core portfolio is a great way to start.
Step 5: Pepper in some stock picks
Once you have core holdings established, it's easier to take the greater risk of making specialised investment plays. You may pick individual stocks, or you might prefer to use sector ETFs or other niche investments to capture returns from a group of stocks. As you gain confidence, you can devote more of your money toward this part of your portfolio, leaving your core untouched to grow more conservatively.
Get started today
Whether you've never thought of investing before or have been trying to get up the nerve to start for years, now's the perfect time to take action.
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If you're on Twitter, follow the Worldwide Invest Better Day buzz with the hashtag #InvestBetter; we have 76 member meet-ups in 12 countries on five continents!
Over at Fool HQ in the US, they'll be broadcasting live from the Rotunda for 12 hours starting at 2pm GMT. There will be live stock recommendations, interviews with Fools and on-location footage from the member meet-ups happening around the world.
Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.
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> Dan owns warrants on JPMorgan Chase, but has no other financial interest in any of the other shares mentioned.
