Savings; life, health and property insurance; wills; IRAs and 401(k)s; disability insurance. You need to have these in hand before you start investing. (Second in a series.)
WASHINGTON, May 29, 2016 – We almost launched our “how to invest” series over two months ago but decided to pause to see if the constantly prying federal government’s latest “rules” governing the treatment of most investment advisers as fiduciaries pertained to what I was preparing to post. I’ve concluded that those rules don’t pertain, since I’m not currently advising anyone except myself.
That said, I’ll still be putting little disclaimer notes at the bottom of every column. (Can’t be too careful in today’s over-regulated environment.)
I’ll be defining what various investment choices are, how they function and the standard tactics that are likely—but not guaranteed—to help make those investments profitable.
I’ll deal with the basics first so that more complicated investments (like ETFs, for example) will make sense, since such investments are often built on basic stocks, bonds and occasionally commodities. In other words, we’ll build a base first and then get into items that can be more complex.
However, before we even get down to the nuts and bolts, there are a few items you’ll want to have dealt with first before you even start to invest. Let’s take a look at them.
Before you even think of investing…
If we learned anything from 2007 to 2010, it was this: No matter what you invest in—be it stocks, bonds, real estate, commodity futures or precious metals—you will have wins and you will have losses. Absolutely nothing is guaranteed, even if the guy peddling an investment to you says it’s guaranteed. And sometimes, as in 2007-2010, you might end up losing nearly every dime you’ve invested. That’s the way things work. Or don’t.
For that reason, even if you feel you’re all set to get going on your investment portfolio, pause for a moment and ask yourself this: Since investing is risky to a greater or lesser degree, am I prepared for the little surprises that life itself will often throw in my way? Specifically:
- In case I get laid off (which most of you will), do I have at least six months or more of my take-home pay squirreled away somewhere in CDs, a stable bank account or (increasingly) a brokerage house bank account or money market fund? And is that money liquid? I.e., can I get at it right away if I need it, or do I have to pay a huge penalty?
- If I own one, have I insured my home, not only for what I paid for it but for what it would cost to replace it if it burned down?
- Whether I own a home or rent one, is my personal property insured at least to some extent against loss?
- Is my car insured, and does that insurance include a decent amount of protection against lawsuits by the other driver? (Most states now require auto insurance at least to some degree.)
- Do I have a current will? (If not, hop to it, as in many states, the state will decide who gets your assets in the event of your death, no matter what you might have intended.)
- Do I have life insurance in an adequate amount, at the very least through my place of employment? (We’ll have a separate section on this a bit later in this series, as it can get a little complicated.)
- Is my health insurance covered in some way, shape or form? (Tough one. The ongoing Obamacare mess makes this item a current and costly movable feast, and things seem to change every day and in every state.)
- Do I have any kind of short- or long-term disability insurance? (This is often covered at work. But these days, this kind of payroll-deduction-provided coverage may be diminishing as companies—and workers—scramble to pay for increasing health insurance premiums.)
- Finally, if I’m employed by a company of reasonable size, does the company have a contributory 401(k) plan? Does the company offer an employee match?
On those 401(k) plans
Regarding this latter item, the Obamacare cost issue has to some extent damaged corporate 401(k) programs nationwide—the programs designed by Congress some time back to employ tax-free employee contributions and (if available) corporate matches to create employee-owned retirement accounts as a replacement for the increasingly obsolete “defined benefit” retirement plans common in the 1950s and 1960s.
Whether they take advantage of them or not, 401(k) plans are, in fact, already investment plans of a sort, though an employee’s investment choices are limited to those investments available within individual corporate-sponsored plans. We’ll discuss these as well in a future column. But up front, you’ll need to learn what you can expect from stocks and bonds on their own before you can adequately direct your own 401(k) account.
By the time we get to our 401(k) column, rules may have changed again, so if you’re in such a plan right now, keep an eye on those HR Department missives on these plans rather than throwing them away without looking.
Finally, if you’re not in any kind of retirement plan at all, you will seriously want to set something up, even if it hurts. As Boomers already know, whatever one saves never seems to be adequate when the time comes.
Given today’s economy and dismal economic future, Xers, Millennials and whoever comes next are, frankly, likely to be in worse shape in this regard. So be sure, if you’re lucky enough to be in your early 20s, to get started on this item today even if you’d rather spend this week’s tiny surplus downing session beers at the local watering hole. While it’s no guarantee, a certain amount of incremental self-denial today could prove to be a real godsend tomorrow.
Bottom line: Pay attention to all the boring talking points and advice we’ve just provided here before you start your own investment program. Remember that investing involves at least some level of risk. So make sure you’ve got your fiscal back covered before you start your own portfolio. In the 21st century, no one, including the feds, will have your back covered. You’re going to have to do that yourself.
Next: The wonderful world of common stocks.
Disclaimer: This series of columns is being offered for educational purposes only. The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any existing or contemplated investment positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications and analysis aren’t necessarily predictive of any future market or government action. Rather, they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.Click here for reuse options!
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