Learn To Invest In 10 Steps

Learn To Invest In 10 Steps

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Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.

Step 1: Get Your Finances In Order

Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start. Gain more insight in Invest On A Shoestring Budget and Should I Invest Or Reduce Debt?.

Step 2: Learn The Basics

You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversificationand market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points. Get started with our Investing 101 tutorial.

Step 2: Learn The Basics

You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversificationand market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points. Get started with our Investing 101 tutorial.

Step 3: Set Goals

Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs. Read more in Basic Investment Objectives andInvesting With A Purpose.

Step 4: Determine Your Risk Tolerance

Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals. For more insight read Risk Tolerance Only Tells Half The Story,  Personalizing Risk Tolerance and Determining Risk And The Risk Pyramid.

Step 5: Find Your Investing Style

Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities. Find your fit in Achieving Optimal Asset Allocation.

Step 6: Learn The Costs

It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees. Read The Lowdown On No-Load Mutual Funds.

Step 7: Find A Broker Or Advisor

The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer. For more tips, read Shopping For A Financial Advisor and Picking Your First Broker.

Step 8: Choose Investments

Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket. Learn more in A Guide To Portfolio Construction and Introduction To Diversification.

Step 9: Keep Emotions At Bay

Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach. ReadWhen Fear And Greed Take Over  for more.

Step 10: Review and Adjust

The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing. Read more on this topic, and the consequences for ignoring these changes, inRebalance Your Portfolio To Stay On Track.

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5 Money-Saving Shopping Tips

5 Money-Saving Shopping Tips

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Have you already squeezed every last penny out of your budget? Maybe not. Thanks to free market capitalism, we can choose from a wide variety of products at a wide variety of prices pretty much any time we want to buy something. Unlike investing, saving money on purchases doesn't require any specialized training and is an easy way for anyone to stretch their budget a little farther.

No matter what your income level, you can give yourself more breathing room by becoming a savvy shopper. Here are five tips to help you get started.

Tip 1: Make The Store Your Last Choice

Most people's default response is to go to a store anytime they need something, but that's not the only way to obtain a needed item. Ask yourself these questions:

Can I get it for free?If you don't need something right away, and you usually don't, it's worth searching on community ad sites like Craigslist or Kijiji, signing up with some local Freecycle groups, and asking around to see if anyone you know is getting rid of whatever you want.

Can I borrow it?
This tactic can be a great money-saver for any item that you use infrequently or will only need to use once. For example, if you only need to use a drill once a year when you change apartments and have to reinstall your curtain rods, you can get by with borrowing a drill from someone else. Many home improvement stores even have tools you can rent. Likewise, instead of spending money on the newest bestseller novel that you will probably only read once, head down to your local library and see if you can borrow the book.

Tip 2: Negotiate When Possible

Some prices are set in stone, and it's a waste of time trying to negotiate with someone who won't budge. However, when you think there's some wiggle room, consider these strategies:

Can I negotiate a lower price?
While you probably can't negotiate the price on many items, like new DVDs or a package of gum, there are plenty of situations where you can negotiate, even in a retail store. For example, if an item is cosmetically damaged, a store may be willing to offer a small discount because that blemished items tend to be more difficult to sell. If a salesperson wants you to buy a bunch of extras with a new computer or cell phone plan, ask for a discount - the salesperson they may be allowed to offer discounts in order to close the deal on big-ticket purchases. Of course, if you're buying an item from a private party, you can always negotiate. Also, you probably already know not to automatically pay the sticker price on a car or house, because negotiation is standard practice on these major purchases and the sticker price is generally higher than the real amount the seller will accept.

Can I barter?
Bartering can be difficult because many people are not accustomed to doing it and it's hard to find someone who wants the service or goods you have to offer in exchange for the what another person is selling. If you have some valuable products or services to offer, however, and you're purchasing from a private party, it's worth asking. Even if the other party isn't willing to barter for the entire item, he or she may be willing to at least reduce the price in exchange for an hour of your expertise.

Tip 3: Time Your Purchase

If you wait to purchase something until you really need it, you're likely to pay the sticker price, but with a little advanced planning, you can save big bucks. 

Will this item go on sale?If you want an electronic good, you will probably have to wait patiently after it is introduced - a sale will emerge once a newer model comes out or the regular price will drop as supply increases and demand drops. As new items become more popular, even if they don't officially go on sale, you may be able to get a good deal on eBay. 

Certain everyday items, like groceries, toiletries and cosmetics, will always go on sale sooner or later, providing an opportunity for you to stock up when your favorite brands are priced at a discount. For anyone who doesn't closely follow the latest fashion trends, clothes are best purchased during end-of-season sales, even if it means you don't get much use out of them until the following year.

Can I get a better price somewhere else?It's usually a bad idea to buy an item at the first place you see it because it's likely to be cheaper somewhere else. For expensive purchases where you have a lot to gain by comparing prices, and for situations, like online shopping, where it's extremely easy to compare prices, the savings you'll achieve are worth the extra time and effort. However, if you don't stand to save much or are likely to waste a lot of time, gas and money by shopping around, don't bother. If you're pressed for time, you can avoid shopping around altogether by making a habit of doing all of your shopping at stores that regularly offer bargain prices, and you'll be confident that you're already getting a good deal.

Tip 4: Substitute

If the item you want to buy doesn't quite fit into your budget, think about similar but less expensive alternatives.

Is there something that doesn't cost as much, but does the job I need it to? Figuring out the real reason behind a pending purchase can help you brainstorm ways to achieve the same result more affordably. For example, if you're worried about being bored during a long flight, you may want to buy a $125 spare battery for your laptop so you can get some work done. In this case, your main concern isn't really getting more work done, but rather finding a way to occupy your time. Instead of buying that extra battery, you could use your laptop on the most energy-efficient setting until the battery runs out, and then spend the rest of the flight reading a library book.

Tip 5: Expand Your Shopping Universe

If you normally head straight to your favorite website, specialty store or the mall when you need to buy something, consider these other shopping options that can save you a great deal of money:

Is someone personally selling what I need?
Garage sales, moving sales and estate sales tend to offer all types of merchandise at much lower than retail prices. You are most likely to benefit from this type of shopping experience for items that are not necessarily needed right away. For example, goods like canning jars, dishes or a jewelry organizer. This can also apply to more practical goods as well. However, don't expect to find absolutely everything at these sales, but do check them out from time to time to add value to your shopping budget.

Does it make sense to buy this item in bulk? Consider big box discounters as a source for the same products you normally buy at more expensive, specialized stores. You may not have ever thought of the drugstore as a specialty store, but when you start comparing their regular prices to those of discount stores like Target and Costco, you might change your mind.

Checkout Time

The ideas presented in this article might seem excessively frugal to some, but when you cut costs in lots of little ways, you can achieve big savings without making big sacrifices. Even thinking about how to save money on relatively minor purchases, like cans of soda or packs of gum, can result in significant savings when you buy these items habitually. It doesn't take much time or energy to get into the habit of considering your purchases more carefully. You may not always make the choice that will save you the most money, and instead opt for convenience, but at least you will have made a conscious and well-informed decision toward that purchase.

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Top 6 Mindless Money Wasters

Top 6 Mindless Money Wasters

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Most people will say they are interested in saving money. Money saved from one area can be spent in another area. Or even better, the money can actually grow as an investment for the future. But despite the benefits of putting some money away, most people take a passing interest in actually doing it. As young adults, they don't think much about retirement; then, as adults, credit card debt becomes a way of life.

But the tough economic times that hit the U.S. in 2007 through 2009 were a wake-up call for many people, causing the public's view of saving to shift. If you'd like to make regular saving a part of your life, read on to find out how to conquer the first step: finding that extra money.

You can begin by paying attention to these top money wasting activities.

Convenience Stores

Many people don't think about the mark-up they pay for convenience store items. Here's a hint: it's huge. This is because, unlike a grocery store, convenience stores don't purchase food in large quantitiesand also because they make you pay more for the convenience they provide. So, unless it's an emergency situation, avoid shopping at convenience stores. The premium you pay for convenience is not worth the assumed convenience you get.

For example, a Coke at a convenience store might cost you a dollar, while you can go to the grocery store and buy a 12 pack for $4. If you tend to pull over for a drink, buy a 12-pack and keep it in your car. If you visit convenience stores often, the annual savings of cutting out these visits can be tremendous. (Follow these five simple steps to keep your spending under control. Read 5 Ways To Control Emotional Spending.)

Cell Phone Plans

Take the time to check your monthly cell phone bill - you may be paying more than you need to. If you are using fewer minutes than your monthly plan allows, switch to a lower-rate plan. If you are using more minutes than your monthly allotment, then upgrade to a higher minute plan. Before making any changes to your plan, sit down with a list of your cell phone company's offerings and compare and determine which plan provides the most value based on your needs. Most cell phone companies charge 40 to 50 cents per additional minute, so going over your allowed minutes by 100 minutes one month will cost you $40 to $50 in that month alone. With many minute plan upgrades costing $10 to $20 a month, they'll easily pay for themselves.

You should also scan through your cell phone plan for added features like text messaging and mobile internet. If you aren't really using these features, get rid of them - they're costing you money each month!

Soft Drinks

This one is a sneaky money waster. Not only does ordering beverages along with a restaurant meal boost your total expenses, but soft drinks also have one of the highest mark-ups of any restaurant item, and thus provide lower value for your money. Consider a typical family of four that eats out twice a week at fast casual restaurants (typical for a middle class family even today).

Assuming an average price of $1.50 for a fountain soft drink, that totals $12 a week, $48 a month, $624 a year. Just cutting out this one item from your meal could mean significant savings that could go into something much more productive, such as a retirement savings plan. If you invest $624 at the market average of 9% a year every year, you would have almost $32,000 at the end of 20 years. So dine out, but opt for water!

Unnecessary Bank Fees

Many people unknowingly pay a lot to their banks in the form of fees. If you don't know what fees your accounts are subject to, spend a few minutes finding out. Some banks charge ATM fees for using another bank's ATM, for example. These can be as high as $5! This amounts to a 25% one-time fee for a $20 withdrawal. The key with this type of fee is simply knowing about it. You would be better off using a credit card to make the purchase.

Go back and examine the rules governing your checking and savings accounts. Many people have accounts with a fixed number of withdrawals and deposits per month. You would be better off with an account maintenance fee of $10 a month than getting hit with two or three different fees a month.

Magazines

If you're the type of person who likes to occasionally pick up your favorite magazine from the local grocery store or newsstand, consider getting an annual subscription. Even if you don't want the magazine every month, a couple of issues at the newsstand are enough to cover the entire annual subscription. For example, a 26-issue subscription toForbes Magazine will cost you less than $25, while one issue at the newsstand costs $5. (Conspicuous consumption could be robbing you of future wealth. See Stop Keeping Up With The Joneses - They're Broke.)

Credit Card Fees

Unless you have a poor credit history, there is no reason to pay annual credit card fees. A host of Visa (NYSE:V), MasterCard (NYSE:MA) and Discover (NYSE:DFS) cards have no annual fee, yet many people pay up to $100 a year for the privilege of holding a credit card. Unless you're an ultra-wealthy, exclusive holder of an elite-level credit card with exclusive perks, most people should not be paying annual credit card fees.

And speaking of credit cards, make sure you make a payment on time every month, even if it's the minimum. Many credit cards charge $39 monthly late fee charges, charges which accrue interest along with your existing balance.

Be Proactive

Spend a couple of hours and go over the above categories along with any other regular habits you may have accumulated over the years. The time will be well spent as it could mean hundreds of dollars of recurring annual savings.

5 Tax(ing) Retirement Mistakes

5 Tax(ing) Retirement Mistakes

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When planning for your retirement, one aspect of retirement savings that you may have forgotten could end up costing you plenty. The effect that taxes have on your retirement savings and income is often overlooked, but it can mean all the difference to your level of financial security. In this article we'll take a look at five of the common tax issues you should be aware of to keep the financial luster on your golden years. (For more tips on saving for retirement, check outAnnuities: How To Find The Right One For You.)

1. Understanding Growth, Income and Cash Flow

This is a distinction that can make a difference in your bottom line. Income is money that you receive and is subject to income taxes. Cash flow is the after-tax proceeds available to you to meet your retirement expenses. Growth is the earnings that you need on your savings and investments to ensure that you have enough income to last for your lifetime and to keep up with inflation.

In retirement, a key goal should be to minimize the impact of taxes on your income, which will increase the cash flow needed to meet your expenses, while leaving enough in your savings to give them the opportunity to grow at a rate sufficient to keep up with (or exceed) inflation.

2. Taking Required Minimum Distributions

If part of your savings consists of qualified plans, 403(b)s, SEP IRAs, 457(b) plans and Traditional IRAs, you must begin to takerequired minimum distributions (RMDs) each year, beginning the year you reach age 70.5. Failure to take the distribution can result in a penalty of 50% of the deficiency.

It is not uncommon to forget or neglect to take an RMD, or to miscalculate the amount and not take out enough. The RMD amounts for each retirement account must be calculated separately. However, if you have multiple Traditional, SEP and SIMPLE IRAs, the total RMD for these accounts can be taken from one or more of the accounts.Roth IRA owners are exempt from this requirement. (To learn more, see Strategic Ways To Distribute Your RMD.)

3. Minimizing Tax on Your Social Security Benefit

If the total of your adjusted gross income (AGI), nontaxable interest, and half your Social Security benefit is above a certain dollar amount based on your individual filing status, then as much as 85% of your Social Security retirement benefit may be subject to income taxes.

However, there are strategies that may be available to you to minimize the income tax on your Social Security, including changing your tax filing status and reducing your AGI by changing the type of assets you own.

4. Rolling Over an Inherited IRA

If you inherit an IRA or another qualified plan, you cannot rollover the account into an IRA you own if you are a non-spouse beneficiary. Only if you are a surviving spouse may you rollover your deceased spouse's IRA or qualified account into your own name. If you are not a surviving spouse, you can rollover the qualified plan account into an inherited IRA in your name (as beneficiary) and the name of the decedent, but only if this rollover option is permitted under the plan.

For IRAs, you can transfer the amount to an inherited IRA in your name (as beneficiary) and the name of the decedent. A spouse beneficiary also has that option, but can also chose to transfer the amount to his or her "own" IRA. (For more, see Common IRA Rollover Mistakes.)

5. Converting a Traditional IRA to a Roth IRA

A Roth IRA is a beneficial retirement asset because none of the earnings within the Roth are subject to income tax when withdrawn, if the distribution is qualified. The tax treatment of Traditional IRAs is just the opposite - with a few exceptions any earnings, as well as principal, will be subject to income tax when withdrawn.

However, any taxable amount you convert from a Traditional IRA to a Roth is taxable as income in the year converted. You could face significant income taxes if the amount you convert dramatically increases your taxable income. Before deciding whether to convert your Traditional IRA to a Roth IRA, consider the increased income taxes you will have to pay due to the conversion. (For more, see Tax Treatment Of Roth IRA Distributions.)

Conclusion

These points illustrate some of the more common tax issues that can affect your retirement if you're unaware of them or fail to take appropriate action. It is certainly not an exhaustive list. Retirement income planning is too important to approach without thorough knowledge of all the issues that can affect the financial aspects of your non-working years. If you haven't already done so, it may be time to consult with a financial professional to keep your nest egg safe. (For more, see Retirement Planning: Tax Implications And Compounding.)

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Vacation Savings Tips

Vacation Savings Tips

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Escaping from the confines of a cubicle or a classroom for a fun-filled vacation is something most people dream about. The good news is that you can enjoy your holiday without spending exorbitant amounts of money. Read on for tips on how to stretch your vacation and your budget.

Do Your Research

Think about what you'd really like to do on your vacation and create a list to narrow your choices - whether it's hitting the beach, going shopping, climbing a mountain or visiting a museum. Consider whether you can do this somewhere nearby, or whether you know anyone who has done your chosen activities before on a similar budget. Alternatively, travel agencies or even chat rooms on the topic can provide great advice on accommodations, places to dine, things to do and tourist traps to avoid. Internet sites such as Yahoo! Travel, Expedia and Priceline are often useful when seeking reasonable fares.

Look For Deals or Coupons

Peruse newspapers, magazines and websites for advertised deals (or coupons) on items like hotels, rental cars or other methods of transportation you'll be using. Major airlines also offer some good money-saving packages, and many clubs or organizations offer discounts to certain demographics such as students and senior citizens, so be sure to ask vendors what discounts are available and whether you qualify. Booking online can often save you up to 30%.

Shop Around

Don't just call the hotel and airline directly to make reservations; call them to inquire not only about price, but also to determine whether any of the travel websites enable you to plan, price and book the trip online. Many travel websites direct travelers in bulk to certain destinations, which can mean cheaper rates than you'd be able to fetch on your own. In addition, some travel organizations offer discounted rates to groups, when asked. If you don't ask, you might not be offered the discount - and don't forget to negotiate!

Pack A Lunch

Unless you've landed a great all-inclusive vacation, one of your biggest expenses when traveling is dining. Consider packing a cooler with your favorite lunch or dinner items. Alternatively, you could visit the local supermarket each day to shop for some of your meals. This can save you a lot of money over the length of your trip.

Have A "Staycation"

A great way to save money is to find a destination that you and your family can enjoy that is close to home. This way, you can avoid costly transportation such as airfare. Alternatively, you can have a "staycation", where you relax at home and enjoy the flavor of your hometown. You can then use some of your savings on a spa day or park pass.

Summer Camps

Many parents don't have the luxury of spending time with the kids all summer. Summer camps can be an affordable way to ensure your children are in a safe environment and give you some time to yourself. To save money, it is often less expensive to send kids to camp in shorter two- or three-day trips throughout the summer rather than for five or more consecutive days. Day camps that bus children to daily activities are an option that cuts the costs of food, lodging and full-time staff. Early registration can also provide discounts, and many camps also offer gift certificates - which might be an ideal birthday or holiday gift for your child or someone you know.

Consider Joining AAA

If you're looking to stay or travel close to home, chances are you'll be relying on the family car. Therefore, it makes sense to ensure that the vehicle is operating properly. In addition to offering roadside assistance (for a price) if necessary, the American Automobile Association (AAA) can help you find a car, and obtain financing and automobile insurance. AAA also offers travel discounts on hotels, cruises and other travel-related items. AAA even offers lower rates at many local merchants.

Find Non-Peak Seasons

Certain destinations are in high demand during certain times of the year. As a result, traveling when everyone else wants to travel can become quite expensive as merchants hike prices during these peak seasons. If you can avoid traveling during a peak season, you can potentially cut costs by 10-50%. Another benefit of avoiding peak season is reduced competition for certain landmarks and attractions. Fewer people means smaller lineups and better photo opportunities. Time of day is another consideration. For example, a theater matinée is often cheaper than the price at night. Time of day can also affect the cost of air travel.

Consider Currency Rates

If your travel plans take you out of the country, high fees related to currency exchange can leave you with a bitter aftertaste. You can easily save a few extra dollars by conducting a pretrip investigation. The best conversion rates are generally found in the country to which you are traveling. However, don't whip our your wallet at the airport, where exchanges tend to be pricey. Instead, head for automated teller machines affiliated with major banks. Also, be sure to check your credit card company's exchange rates before you leave. You may be charged 1% for conversion as well as a 1-2% service fee. This is generally less than what you'd pay if you were exchanging cash ortraveler's checks.

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5 Investing Statements That Make You Sound Stupid

5 Investing Statements That Make You Sound Stupid
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Some people love to talk stocks, and some people love to laugh at those people when they try to sound smart and important but don't know what they're talking about. If you want to be a part of group No. 1 and avoid being the brunt of the jokes from group No. 2, you've come to the right place. This article will help you sound knowledgeable and wise while talking about the market. Here are five things you shouldn't say, why you shouldn't say them and what an experienced investor would have said instead.

Statement No. 1: "My investment in Company X is a sure thing."

Misconception: If a company is hot, you'll definitely see great returns by investing in it.

Explanation: No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies - Enron, WorldCom, Adelphia and Global Crossing, to name a few - have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it's hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.(To learn about other "sure things" that went bad, read The Biggest Stock Scams of All Time.)

What an experienced investor would say: "I'm willing to bet that my investment in Company X will do great, but to be on the safe side I've only put 5% of my savings in it."

Statement No. 2: "I would never buy stocks now because the market is doing terribly."

Misconception: It's not a good idea to invest in something that is currently declining in price.

Explanation: If the stocks you're purchasing still have stablefundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you're interested in as if they're on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock's price has been driven down. Make sure it's just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn't mean you should, too. (To learn more read, What Are Fundamentals? and Buy When There's Blood In The Streets.)

What an experienced investor would say: "I'm getting great deals on stocks right now since the market is tanking. I'm going to love myself for this in a few years when things have turned around and stock prices have rebounded."

Statement No. 4: "My investments are well-diversified because I own a mutual fund that tracks the S&P 500."

Misconception: Investing in a lot of stocks makes you well-diversified.

Explanation: This isn't a bad start - owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you'll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds (ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small-cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio. (To get started, readDiversification Beyond Equities and Diversification: It's All About (Asset) Class.)

What an experienced investor would say: "I've diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that's just one component of my portfolio."

Statement No. 5: "I made $1,000 in the stock market today."

Misconception: You make money when your investments go up in value and you lose money when they go down.

Explanation: If your gain is only on paper, you haven't gained any money. Nothing is set in stone until you actually sell. That's yet another reason why you don't need to worry too much about cyclical declines in the stock market - if you hang onto your investments, there's a very good chance that they'll go up in value. And if you're a long-term investor, you'll have plenty of good opportunities over the years to sell at a profit. Better yet, if current tax law remains unchanged, you'll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly but gains and losses are not realized until you act upon the fluctuations.

What an experienced investor would say: "The value of my portfolio went up $1,000 today - I guess it was a good day in the market, but it doesn't really affect me since I'm not selling anytime soon."

ConclusionThese misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. They may even tell you you're wrong if you try to correct them. Of course, in the end, the most important thing when it comes to your investments isn't looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you'll be on the right path to higher returns.

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8 Financial Tips For Young Adults

8 Financial Tips For Young Adults
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Unfortunately, personal finance has not yet become a required subject in high school or college, so you might be fairly clueless about how to manage your money when you're out in the real world for the first time. If you think that understanding personal finance is way above your head, though, you're wrong. All it takes to get started on the right path is the willingness to do a little reading - you don't even need to be particularly good at math. To help you get started, we'll take a look at eight of the most important things to understand about money if you want to live a comfortable and prosperous life.

1. Learn Self Control

If you're lucky, your parents taught you this skill when you were a kid. If not, keep in mind that the sooner you learn the fine art of delaying gratification, the sooner you'll find it easy to keep your finances in order. Although you can effortlessly purchase an item on credit the minute you want it, it's better to wait until you've actually saved up the money. Do you really want to pay interest on a pair of jeans or a box of cereal? If you want to keep your credit cards for the convenience factor or the rewards they offer, make sure to always pay your balance in full when the bill arrives, and don't carry more cards than you can keep track of.

2. Take Control of Your Financial Future

Instead of relying on others for advice, take charge and read a few basic books on personal finance. Once you're armed with personal finance knowledge, don't let anyone catch you off guard - whether it's a significant other that slowly siphons your bank account or friends who want you to go out and blow tons of money with them every weekend. Understanding how money works is the first step toward making your money work for you. (Refer to Investing Books It Pays To Read for a list of a few to get you started)

3. Know Where Your Money Goes

Once you see how your morning java adds up over the course of a month, you'll realize that making small, manageable changes in your everyday expenses can have just as big of an impact on your financial situation as getting a raise. In addition, keeping your recurring monthly expenses as low as possible will also save you big bucks over time. If you don't waste your money on a posh apartment now, you might be able to afford a nice condo or a house before you know it. (ReadDefine Your Personal Debt Redline to learn where to draw the line in your budget)

4. Start an Emergency Fund

Having money in savings to use for emergencies can really keep you out of trouble financially and help you sleep better at night. Also, if you get into the habit of saving money and treating it as a non-negotiable monthly "expense", pretty soon you'll have more than just emergency money saved up: you'll have retirement money, vacation money and even money for a home down payment. Don't just sock away this money under your mattress; put it in a high-interest online savings account, a certificate of deposit or a money market account.

5. Start Saving for Retirement Now

Just as you headed off to kindergarten with your parents' hope to prepare you for success in a world that seemed eons away, you need to prepare for your retirement well in advance. Because of the way compound interest works, the sooner you start saving, the less principal you'll have to invest to end up with the amount you need to retire, and the sooner you'll be able to call working an "option" rather than a "necessity". Company-sponsored retirement plans are a particularly great choice because you get to put in pretax dollars and the contribution limits tend to be high.

6. Get a Grip on Taxes

It's important to understand how income taxes work even before you get your first paycheck. When a company offers you a starting salary, you need to know how to calculate whether that salary will give you enough money after taxes to meet your financial goals and obligations. Fortunately, there are plenty of online calculators that have taken the dirty work out of determining your own payroll taxes, such as Paycheck City. These calculators will show you your gross pay, how much goes to taxes and how much you'll be left with, which is also known as net, or take-home pay. (Read Fatten Up Your Take-Home Pay In 4 Easy Steps for more related information)

7. Guard Your Health

If you're uninsured, don't wait another day to apply for health insurance; it's easier than you think to wind up in a car accident or trip down the stairs. You can save money by getting quotes from differentinsurance providers to find the lowest rates. Also, by taking daily steps now to keep yourself healthy, like eating fruits and vegetables, maintaining a healthy weight, exercising, not smoking, not consuming alcohol in excess, and even driving defensively, you'll thank yourself down the road when you aren't paying exorbitant medical bills.

8. Guard Your Wealth

If you want to make sure that all of your hard-earned money doesn't vanish, you'll need to take steps to protect it. If you rent, get renter's insurance to protect the contents of your place from events like burglary or fire. Disability insurance protects your greatest asset - the ability to earn an income - by providing you with a steady income if you ever become unable to work for an extended period of time due to illness or injury.

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