Investing: How to Get Started
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
To the novice investor, the increasing number of investment choices available can seem confusing. Most Financial Advisors, however, agree that you should follow a few basic steps when just getting started with investing:
1. Determine your financial objectives.There are many reasons for investing. Some of the most common are earning more current income; building your net worth; saving for a home, college education for your children, or your retirement; and reducing your tax burden.
Each of these objectives suggests different investment strategies and different types of investments. For example, if you want more current income, you might do better with a fixed-income investment, such as a bond, rather than a growth-company stock that offers long-term potential but may fluctuate more than a bond.
2. Understand your current financial position. Calculate your net worth by adding up all of your assets (such as the value of your home, personal property, investments, bank accounts and pension or profit-sharing plans) and then subtracting your liabilities (money you owe for such things as mortgages, car loans, credit-card debt and other bills).
If most of your assets are in real estate (which is true for many people), you may need to convert your investments to cash in an emergency. Therefore, you may not want to invest in long-term instruments. However, if you have assets that can be converted easily to cash (like money-market funds or stocks), you may want to invest longer-term in search of higher return potential.
Similarly, you should calculate an annual household budget by adding up all of your income for the year (salary, interest and dividends on investments, distributions from pension or profit-sharing plans, alimony) and then subtracting your regular, essential expenses (such as mortgage or rent payments, food, utilities and clothing). The balance is the amount you have to spend on personal uses, such as vacations and gifts, or to invest.
3. Understand your tolerance for risk.Most investments have some measure of inherent risk. If you have sufficient assets and income, you might be willing to accept greater risk in exchange for a potentially larger gain. However, if you cannot afford to risk your investment principal, you probably should consider lower-risk investments —which, while relatively safe, usually do not earn high returns.
4. Understand your investment. Before you invest, you should understand how the investment works. If, for example, you are thinking about buying the common stock of a company, take the time to learn about the company and the industry (or industries) in which it operates by reading the company’s annual report or analysts’ research reports about the company.
A mutual fund may seem to be a simple investment because your money will be managed by professionals. However, you should know such things as the fund’s short- and long-term performance compared with that of other funds. The fund’s investment objective and strategy (what the fund invests in — stocks, government bonds, municipal bonds, etc.), and the fund’s charges, expenses and risks. These, and other questions on the investment company, are answered in the fund’s prospectus, which can be obtained from your financial professional. Read and consider it carefully before investing.
5. Seek professional advice. As briefly outlined above, there are many things you should know before you invest. An experienced financial advisor can help you — from setting financial goals and understanding various investments to monitoring the success of your account.
As with your investments, be sure you understand how a Financial Advisor will charge for services, and select an advisor who is comfortable with your objectives. Some advisors work only with aggressive, high-risk investors, while other advisors are well suited to long-term, security-conscious investors.
If you take the time to understand your financial situation, set reasonable goals and work with a qualified Financial Advisor, your experience with investing has a better chance of success.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)