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The Financial Freedom
Odyssey
By Lynda B. Claiborne
| In her columns, Lynda will
follow two women, Mary and Anna, as they gain control of their finances and build their
investment portfolios. Mary is fifty-five, recently widowed, and a homemaker. Anna is
thirty-three, divorced with children, and works outside the home. Neither has experience
with investing, and both were nervous about the stock market and fear losing their money. |
Five
Steps To Building A Portfolio
 What does financial freedom mean to
you? For most people, it is living free from financial worry. We must invest today to
build a secure tomorrow, but many people put off investing because they don’t know
how to begin. But managing your investments does not have to be an onerous task, as you
will find as we follow Anna and Mary and their progress towards financial freedom.
Anna and Mary met
when they attended a "Suddenly Single" seminar at their local library. Susan,
the seminar leader, presented five steps to follow on their way toward a secure future.
Step 1
Tell your money where to go, instead of wondering where it went
The first step to financial freedom
is to gain control of your money. Develop a budget that includes saving at least 10% of
your monthly income, and stick to it month after month. Soon saving will become a habit.
Step 2
Learn the Language of Investing
Susan advised Mary and Anna to read
magazines such as Money, Worth, Smart Money, and Kiplinger's Personal Finance. Reading
"how to" books on investing and saving also adds to knowledge. Libraries provide
a source for research on companies in Value Line and mutual funds in the Morningstar
Reports.
Step 3
Understand Your Objectives & Risk Tolerance
Mary and Anna learned that stocks
generally provide a better return than bonds, while bonds have lower risk.
Younger individuals may invest
primarily in stocks, which outperform bonds over the long term. Those closer to retirement
opt for more bonds to avoid stocks greater short-term market fluctuations.
Mary and Anna learned that their
return and risk thresholds will dictate their own asset allocation, a mix of stocks and
bonds to provide adequate return with less risk.
Step 4
Time in the Market Counts, Not Market Timing
Statistics show that trying to time
the market, buying at the lows and selling at the highs, is difficult and even the pros
fail. More important is being invested over the long term, holding stocks for at least
three to five years.
Dollar cost averaging is also a good
technique, investing a specific amount of money each month in a mutual fund. In some
months you’ll buy high, in others low and it will balance out in the long term.
Step 5
Get the Advice You Need
Anna and Mary decided that seeking
professional help made sense for them. They learned that financial planners typically
charge a fee for their advice, while full service stock brokers charge commissions on
securities purchased or sold. Discount brokers and on-line trading sites do not provide
the advice and support that is so important to novice investors.
Mary and Anna left the seminar
feeling more confident about their financial futures, knowing that five simple steps will
lead them to financial freedom. Next month, we’ll follow them to their financial
adviser, and find out how their individual investment objectives resulted in different
portfolios.
At WIFE we welcome your comments and questions.
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