Investing For Dummies Three e-book Bundle

Chapter 1

First Steps on the Money Trail

In This Chapter

Understanding basic investment philosophy

Discovering your own money make-up

Looking at what you may be investing already (whether you know it or not)

Getting familiar with five basic investment choices

This chapter explains the first steps you must take in your investing ventures. But take heed: in this chapter (and throughout the book, for that matter) you need to think deeply about some personal matters, to understand yourself better and know where you’re going in your life and what makes you tick. In other words, you need to wear two hats – that of investor and that of philosopher. So be prepared for some tests that ask just what sort of person you are, what you want for yourself and what you’re prepared to do for it.

And if you don’t see a test, that’s no bar to testing yourself. The decisions you make are down to you and no one else.

Understanding the facts and mechanics of investment decisions is just a start. Knowing how to apply them to your own circumstances, and to those of your family and other dependants, is what will make your strategy succeed.

What’s Your Reason for Investing?

This section is very basic, comprised of just one simple Investing For Dummies test question: why did you buy this book? Chances are you probably did so for one of these four reasons:

You have no money but want to make some. Most people fall into this category. You want to invest some money and accumulate funds but don’t know where to start. How you go about it depends on how well you can discipline yourself. Take heart, though: even the most confirmed shopaholic can build up a nest-egg for later use.

You have some money, want it to make more and currently make your own investment decisions. You’re the traditional investor who wants to make your personal wealth grow. You already make your own investment decisions and want to get better at it. How you go about it depends on who you are, how you made your money and where you hope to be in 5, 10 or 20 years.

You have some money, want it to make more and currently have others handle the investment process for you. Maybe you have fund managers handle your investments so you can gain tax advantages or because your savings are lumped together with those of others in a pension or similar fund. Or maybe your life is just too busy or complicated for you to do the investing yourself. Regardless, you now want to understand how investing works so you can either take over your own investment decisions or monitor what fund managers are doing with your hard-earned cash. I’m not sure many people will pick up this book to check up on fund managers, but I could be wrong.

You’re now in charge of your pension decisions. Unless you work in the public sector, the chances are that you now have to take stock of your pension. What you get when you retire is now largely up to you rather than your former employer or employers. As this is likely to be the biggest investment decision you make, Chapter 16 is devoted to helping you build your retirement funds and then make the most of your pension’s nest-egg.

What’s Your Personality Type with Money?

Some people spend all they have each month (and then some on top – ouch!). Others put away a bit in the bank or building society on a regular basis. And still others buy and sell stocks and shares, with some going in for some very complex investments.

Test time: you need to decide whether you’re a spender, a saver or an investor. Doing so isn’t as easy as it looks though. Spenders can be savers or investors. Savers can be spenders and investors. And investors are generally also savers and must, at some stage, be spenders. But most people are predominantly one of the three types – spender, saver or investor. Which category you think you fit into determines what you do from now on, how you react and how you progress.

Spenders have fun

Spenders are generally people who live for the here and now. They may want more than they can have and end up borrowing money, probably on plastic cards. For many spenders, accumulating cash for the future has no priority.

Here are ten attributes of spenders. If the majority of them apply to you, then, yep, you’re a spender:

You don’t look forward to the end of the month.

You love new things – the glossier the better.

You have more than one credit card.

You can’t resist two-for-one offers.

You buy unnecessary clothes.

You’re always first – and last – to buy a round of drinks.

You believe in living a lot now.

You see the future as a foreign land.

You worry about money at times.

You buy glossy magazines as much for the advertisements as the articles.

If you’re in this category, your first priority is to recognise that investors can’t always be spenders. Getting familiar with investing is a good way to accomplish this priority because it offers an alternative use for your cash.

Know that while on your way to becoming a saver or an investor, you can start with very small sums. You can become a saver with £1. And some regular stock-market based investment plans start at £20 a month, around the cost of a small packet of crisps a day.

Savers have cash

Savers are people who want to keep their financial cake and eat small slices at a later date. Here are ten saver attributes. Tick those that apply to you, and if the majority do, then you’re probably a saver:

You have a surplus at the end of each month.

You go to the supermarket with a shopping list.

You don’t have a credit card, or you pay it off in full each month.

You’re prepared to put off purchases.

You’d rather buy second-hand than run up a debt.

Your property is more important than your furniture.

You look at the display windows at banks and building societies.

You know what the current interest rates are.

You believe in the saying waste not, want not.

You’ve read Frugal Living For Dummies (published by Wiley) – or, if you haven’t, you’ll get a copy the next time you book shop.

Saving is a stage you must reach before investing. You can be a saver as well as an investor, but you can’t be an investor without first saving up some money to invest.

Investors build up future funds

Investors are people who are prepared to go the extra mile to try to ensure that their wealth goes the extra thousands, tens of thousands or even more. Investors want control over their money but are ready to take a risk provided that they’re in charge and know the odds. They want their money to work hard for them – as hard as they worked to get the money.

You don’t need an MBA, a posh old school tie or stacks of money. However, know that although you can sleepwalk into just saving your cash, you must be wide awake to be an investor.

‘Hi, it’s me, Spender. Can’t I just use my credit card to finance an investment?’

You can’t use a credit card to buy investment products over the phone, via the Internet or in other circumstances where you can’t send a cheque. Some of the reasons lie in the complexity of consumer credit legislation. Another factor is that financial companies only want you to invest what you can afford, although unauthorised, illegal and probably fraudulent offshore investment firms may try to sucker you into schemes by telling you to use your credit card.

But the most important reason you shouldn’t borrow to invest or save is that doing so only makes financial sense if the return is going to be higher than the interest rate charged. Paying 29.9 per cent annual interest – and that’s by no means the top credit card rate – is pointless unless you can be very sure that your investment will grow even faster and that your original capital will be safe. Both now and in all of history, no such investments exist.

And note that even if you could borrow at 0 per cent annual interest, you’d still have to be sure of getting your money back with one of those rare investments that can’t fall, in order to be better off.

As a pure saver, you really don’t have to know what you’re doing. You can just stash your cash under the bed, for example. As an investor, you must know what you’re doing and have the self-discipline to follow your strategy, even if the strategy is doing nothing, buying and forgetting, or benign neglect.

So are you an investor? Check out these attributes to find out:

You have spare...