The Often-Overlooked First Step to Investing (Hint: It’s Easy!)
Amanda Holden is a personal finance expert providing hilarious and practical financial advice on her site, The Dumpster Dog Blog.
Should you invest in Lululemon stock or Tesla stock? Facebook or Apple? Tech or health care? Have you studied your balance sheets? Forward-looking price-to-earnings ratios? Oil prices and housing starts?
J/K! None of that sh*t matters. (At least, not for most of us.)
With investing, the most important decision you make is not which stock you pick but whether you invest in stocks at all, or bonds, and cash, and other broad categories of investments (called "asset classes"). This big picture decision is called "asset allocation" and should be what gets the majority of your attention!
How does one determine asset allocation? By analyzing personal goals, which are the ovule of all investing decisions. They're unsexy and boring so folks tend to rush through 'em, but skipping this basic is like agreeing to marry someone without first checking to see if s/he has a job, wants kids, is potty trained, etc. First things first!
When looking at any pool of money, you must always first ask: What is this money for? In other words, what is the goal? Then, think about your goal through these three lenses:
- Time frame
- Knowledge of how the different asset classes (stocks, bonds, cash, etc.) have performed and behave over time
Before we talk about No. 1 and No. 2, let's talk about No. 3 for a minute — a quick review of stocks and bonds is in order!