Part I
Investment Basics
In this part . . .
The absolute basics. If thatâs what you need, then this part is where youâll find them.
Here, I tell you what the term investment really means and introduce you to five basic investment choices. In addition, I explain how to assess what you already have and the sort of returns you can expect. I get into a little bit of investor psychology too, letting you know some specific emotions that make investors tick. I also talk about risk and reward â the benefits and drawbacks of various investment possibilities and ways to increase your odds of successful returns. And I discuss the great importance of reading the small print in all investment situations. A lot of info, yes. But I present it in a friendly, easy-to-understand way, especially for beginner investors.
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 youâre going in your life and what makes you tick. In other words, you need to wear two hats â 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 youâre prepared to do for it.
And if you donât see a test, thatâs 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. Whatâs 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 donât 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. Youâre 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. Iâm not sure many people will pick up this book to check up on fund managers, but I could be wrong.
Youâre 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 pensionâs nest-egg.
Whatâs Your Personality Type with Money?
Some people spend all they have each month (and then some on top â 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 youâre a spender, a saver or an investor. Doing so isnât 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 â 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, youâre a spender:
You donât look forward to the end of the month.
You love new things â the glossier the better.
You have more than one credit card.
You canât resist two-for-one offers.
You buy unnecessary clothes.
Youâre always first â and last â 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 youâre in this category, your first priority is to recognise that investors canât 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 ÂŁ1. And some regular stock-market based investment plans start at ÂŁ20 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 youâre probably a saver:
You have a surplus at the end of each month.
You go to the supermarket with a shopping list.
You donât have a credit card, or you pay it off in full each month.
Youâre prepared to put off purchases.
Youâd 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.
Youâve read Frugal Living For Dummies (published by Wiley) â or, if you havenât, youâll 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 canât 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 theyâre in charge and know the odds. They want their money to work hard for them â as hard as they worked to get the money.
You donât 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.
