How To Be A Smart Investor – The key is first knowing what your goals are.

By Lynn Brenner

You can be a smart investor, whether the financial markets are moving up, down or sideways – and it doesn’t take specialized training or a crystal ball. The key to success is taking the right steps before you pick investments. These commonsense guidelines will point you in the right direction:

Determine your goal. Too many people begin by looking at financial products and asking, “Is this a good investment?” No investment is good at everything. You need an investment that fits your indicidual goal. And because you have more than one goal, you’ll need more than one kind of investment.

For example, if you plan to use the money you’re investing within a few years, your priority is to protect the principal. Best choice: money-market funds or CDs. You’ll get back every dollar you invest, plus modest interest. The more distant your goal, the more you need growth to beat inflation. (If inflation average 3% a year, today’s dollar will be worth only about 50 cents in 25 years.) Best choice: a combination of stocks and bonds. Stocks have consistently outpaced inflation over periods of 10 years or more. And bonds pay interest, which helps to cushion your losses (and steady your nerves) when stock prices fall.

Make a plan. Decide what percentage of your money to put into each investment category, based on your goals and your tolerance for risk. For example, a classic mix for retirement investing is 60% stocks, 40% bonds. Combining investments that behave differently keeps your portfolio from jumping up and down too much. That’s good for your wallet as well as for your peace of mind.

Always have a plan before you invest any money.

Rebalance your investments. You need to maintain your target percentages. Let’s say you start with 60% stocks and 40% bonds. If stocks soar, at year-end you may find you have 65% in stocks and only 35% in bonds. To readjust to the original 60/40 mix, transfer money from stocks to bonds. This is important: If you don’t rebalance each year, your portfolio eventually will become very different from what you intended.

Shop around. Comparison shop! Fees vary greatly, and paying even a fraction of 1% less each year can substantially increase your long-term return. For example, suppose Fund A charges $100 a year on a $10,000 investment, and Fund B charges $150. If both earn 9% a year, in 25 years you will have pocketed $7,500 more from Fund A.

Buy no-load funds. “No-load” means there are no sales fees, either upfront or when you cash out. Their annual expenses are lower too.

Keep it simple. You don’t need more than five funds (big U.S. stocks, small U.S. stocks, international stocks, total bond index, and money market) to be well-diversified. Avoid investments that take lots of time and expertise, like commodities and collectibles. And never invest in anything that’s pitched online or over the telephone!

Source: PARADE, November 5, 2006