How to Invest — in Stocks, Bonds, Retirement Accounts

If your retirement plan is to be financially secure and you don't have generous pension income coming to you, you'll probably want to learn how to invest, which for most people means moving beyond a savings account and certificates of deposit to stocks and bonds, establishing a strategy and using investment vehicles such as Roth IRAs.

Taking control of your financial future can make your retirement much more comfortable and less stressful. Here's a guide to what you need to know about how to invest.

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Are you ready to invest?

First things first, though: Not everyone is quite ready to invest. Here's a handy checklist to review before investing — make sure the statements below apply to you:

  • You're not currently saddled with high-interest rate debt, such as credit card debt. If you are, pay that off first.
  • You have a fully loaded emergency fund, or you know how you'll be able to handle an unexpected big expense. Don't put the only extra dollars you have in the market, as you might need them for emergencies.
  • You understand that the value of your holdings will fluctuate and that sometimes you'll lose money. The stock market will occasionally stagnate or head south for a while, and bond prices rise and fall in relation to the economy, too.
  • You're willing to do some math. For example, it's good to be able to know what portion of your portfolio each holding represents and to notice as the proportions change.
  • You won't need any of the money you invest in the stock market for at least five years, if not 10 or more. That type of time frame is important so that you can ride out any downturn and won't have to sell when prices fall.
  • You can tell the difference between a balance sheet and an income statement — and you know where to find them. If you want to choose individual stocks in which to invest, you'll need to be able to make sense of each company's financial statements to see how healthy and promising they really are. (If you opt for simple index funds, you don't need to learn all this.)
  • You know that it's much more important to understand and follow a business than to just follow stock prices each day. After all, you're buying part of these businesses.
  • You have a long-term investment horizon, aiming to hold on to your stocks for years, as long as they remain healthy and growing. It's tempting to chase a quick buck, but that's not how most fortunes are built.
  • You know to compare your performance to a benchmark such as the S&P 500 index. If you're not beating your benchmarks, you need to rethink your strategy or opt for simple index funds — more on them later.

Your investing checklist

Before investing in any company, you should:

  • Know the company's major products, services, and competitors.
  • Be able to explain exactly why you're buying stock in the company and what would make you sell it.
  • Understand its competitive advantages.
  • Be familiar with its risks and challenges.
  • Have studied its financial statements and assessed various measures (such as profit margins).
  • Have multiple sources of information about it.
  • Expect to continue monitoring the company, including by reading its quarterly reports.

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