Investment Strategy For Beginners

You have managed to accumulate some money to invest.  Now where are you going to put it?  This is important.  You don't want to just drop your hard earned money anywhere.

ALL INVESTMENTS ARE NOT CREATED EQUAL

It's true.  There are different investment types for different situations.  For the purpose of this article we are going to look at 3 very broad investment types.  Those being Safe Investments, Medium Risk Innvestments and High Risk Investments, all serve a purpose and have a place in your personal investment portfolio.

SAFE INVESTMENTS

Before we get into safe investments it's important to note that there is no such thing as a 100% safe investment.  Investments of any kind carry some degree of risk so when we are talking about a safe investment we are simply meaning an investment with a low level of risk.

So that being said, what is a safe investment?  Simply an investment with a low level of financial risk.  That means you are not likely to lose you investment principle.

Safe investments would include interest bearing money market mutual funds, Government backed savings bonds or any investment that is locked in for a specific length of time at a specific, guarenteed rate of return, such as a GIC. 

MEDIUM RISK INVESTMENTS

A medium risk investment will obviously carry more risk to your investment capital than the safe or low risk investments.

The medium risk type of investment would include mutual funds that have a fluctuating share price.  The value of this type of investment would move based on external factors such as political unrest, natural disasters, the economy in general.

Your capital however, is relatively safe since it is held as part of a multi-million dollar mutual fund.  You can however lose money.  As the share price drops so does the value of your investment.  On the other hand, as the share price raises so does the value of your investment.

Mutual funds tend to move slower than stocks so you should have time to exit out of an investment if you decide you are going to lose money.  Vigilance is the key.

HIGH RISK INVESTMENTS

There are many different types of high risk investments out there but for the purpose of this aricle we will stick to stocks.

When you invest in the stock market you are investing in individual companies.  You purchase shares of a company.  The value of that share will fluctuate depending on the success or failure of that company.  You have no control over the running of that company (except for the number of votes your shares entitle you to!). 

The value of the shares you own in a company CAN drop to $0.00 - and fast!  You can also realize gains of several 100% if you choose wisely (and all the stars are lined up correctly, you sleep with a horseshoe under your pillow and eat 4-leaf clover salad regularily!).  Needless to say, the risk involved in investing in the stock market directly is high.

YOUR INVESTMENT STRATEGY

As I mentioned at the beginning of the article there is a place for all the investment types in your portfolio. 

Start by thinking of your portfolio as being in the shape of a pyramid made up of 10 bocks.  So you would have 4 blocks on the bottom row, then 3 blocks, 2 blocks and finally 1 block on the top row.  Now give each block an equal value - say $100 - making your pyramid worth a total of $1000.

In order to achieve maximum returns with minimum risk you need exposure to all three investment types.  The pyramid you create will help you manage your risk.

     Bottom Layer

Your  bottom layer of the pyramid needs to be the strongest layer.  It's the foundation everythings else is built on so make it strong.  Fill the bottom 4 blocks with safe - low risk investments.

     Layer 2 & 3

The next layer sits directly upon the foundation layer.  It consists of 3 blocks.  The layer above it consists of 2 blocks.  You can fill these 2 layers (or 5 blocks) with medium risk investments (mutual funds).  Remember to do your research and choose funds that are increasing in value based on the external factors at play.

     Top Layer

The top layer of your pyramid consists of a single block.  This block can contain your high risk (stocks) investment.  It should also contain an amount of money you are prepared to lose should the stock your invested in drop to nothing.

By following a pyramid structure for your investment portfolio you are limiting your risk while maximizing your profits.  You have a strong base (40%) of your investments in something that is growing slowly but is relatively safe.  The middle of your pyramid (50%) is invested in medium risk mutuals which is providing slightly more aggressive growth with the possibility of some ups and downs but over the long term should provide decent returns.  Finally, the top layer (10%) is dabbling in the stock market, looking for some big returns but at a much greater risk.

This is just one possible example of a pyramid.  If you are a more conservative investor you could have the base and next layer (70%) invested in low risk investments, (30%) in medium risk investments and nothing in the high risk stocks.  The mix is up to you but I suggest you have at least the base layer in low risk investments and never more than the top 2 layer (3 blocks) in the stocks.  This will help keep your investment pyramid growing and relatively safe.

Invest in one pyramid at a time.  It may help to draw it out on paper and fill in the blocks as you go.  Each block will be worth $100 making each completed pyramid worth $1000.  When you have one pyramid finished start another. 

When you start to see returns on your investments you should realocate your money.  Change the value of each block to ... say ... $150.  Start over at the base and increase each block to $150.  Do this about once a year or more often if your high risk investment is really putting out for you.  Remember to fill the bottom layers first and keep your high risk investments to between 0 - 30% of your pyramids value.

Investing can be fun but remember you have some goals.  You want to make money!  Don't allow yourself to be invested to heavily in any one area.  Invest in different mutual funds and stocks or interest bearing investments and keep a close eye on how your investments are preforming - you may need to make some changes.

I said it before but it bears repeating : Vigilance is the key!