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Investment Strategies for the Average Joe

Mar 10, 2008
Investment strategies for the long term are a vital to our future. How you invest now may be the difference between a comfortable retirement, and working for the rest of your life. Nobody likes the idea of having to work for the rest of their life, and we have put together a list of do's and don'ts to secure a comfortable retirement.

Tip #1 Educate yourself

There are people out there who play the stock market like they play the lottery. This is very dangerous, gambling on the stock market is the equivalent of going to Las Vegas and putting your life savings on the line. With any investment that is going to provide a decent return, there is risk. How much risk you take on with any investment directly affects the return. The general rule of thumb is, the higher the risk, the higher the return on your investment, and likewise, the lower the risk, the lower your return. The risk of investing into just a savings account has been explained.

While investing in stock is riskier, educating yourself can reduce the amount of risk you take on. This includes finding out what common terms are and what they mean. Understanding the financial statements of the company you want to invest in, and understanding the market that you are investing in.

Tip #2 Devise a plan

This step is just as important as the first, having the education is useless without having some kind of direction. Decide where you want to be by the time you retire, where you want to be when you hit fifty. Evaluate where you are now and what you want to accomplish in the next year, you can never plan too much.

You will also need to decide what kind of retirement you want to have. Do you want to maintain the quality of life you have now? Do you want to retire rich? Filthy rich? Or do you want enough to just get you by every month? Realize what you want to do and devise a plan.

Tip # 3 Investing is vital to your retirement

This cannot be stressed enough. It used to be that you worked for a company for 30 years until you retire, you get your office party and the faux gold watch, but you had a pension and social security waiting for you afterwards. Nowadays you have companies cooking the accounting books, and executives being the only ones with guaranteed pensions, and CEO's abandoning their companies leaving their employees with nothing while they take their guaranteed multi-million dollar pensions home.

What does this mean? It means that the person with your best interest is you. Nothing is guaranteed any more, not even social security. Corporations are replacing pensions with 401k plans, in essence they are shifting the responsibility for your retirement from them to you. It is up to you to decide whether you want to invest in your future. Realize that if you decide not to invest at all, you are throwing you future away.

Tip # 4 Research Research Research

There are so many reasons that you need to research whatever investment vehicle you choose. Whether its real estate, stock, whatever, you should never invest off of an assumption. Most investors refer to this as due diligence. First and foremost, never invest off of a "tip." There is always someone out there that knows what the next big investment is. They'll tell you to buy some shares of so and so stock because they are guaranteed to give you phenomenal returns.

While the advice may have some truth, it is best to do a little research first before putting any money into it. When doing research, it helps to understand financial statements. In general, if a company has more costs than it does revenue, this means the company is not turning a profit. In 2000, Amazon.com (NASDAQ: AMZN) was selling its shares at $113.00 per share, all while never having turned a real profit since the company started.

Today Amazon's stock can be bought for $45 a share. Imagine if someone invested their entire life savings into Amazon's stock at this time, they would have less than half of what they saved left. This is the reason for the most recent stock market crash, investors were buying shares from companies that could not show a profit. Companies were having lavish office parties every week because their stock was flying through the roof, all while their product sales could not fund these expenses.

Another reason for the recent stock market crash is because a lot of investors invest with emotion rather than knowledge. Over the holidays investors feared another terrorist attack, so they sold shares fearing another attack would drive the stock market back down. The emotion was fear. And that fear is detrimental to the stock market. If enough investors get scared and begin to sell their shares, the market will surely drop. If more investors are buying than selling, the stock market will rise.

Tip # 5 Inflation

The final tip is also a part of research, understanding inflation. It is important to know that as it pertains to your future, inflation is not good. The Webster's dictionary defines inflation as: an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level. In other words, as time goes on, prices rise.

A good example of inflation, is how a million dollars today, isn't what it was 20 years ago, and it wont be what it is 20 years for now. If it would take $2 million to retire today, find out what $2 million will be by the time you retire, otherwise you will be selling yourself short.
About the Author
Robert Abrom is the CEO of Abrom Research Inc., find more resources for your journey to entrepreneurship at http://abromresearch.com
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