Monthly Investment Message: March 2016

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

Tips for Beginning Investors

Every year, some people start to invest for the very first time.  Many investment “newbies” are young adults who have recently landed their first full-time job and enrolled in a tax-deferred 401(k) or 403(b) employer retirement savings plan. Others are older adults who have accumulated (or inherited) a lump sum of money. Below are eight tips for successful investing:


  • Develop an “Investor’s Mindset”- When switching from savings products (e.g., money market funds and savings accounts) to investments (e.g., stocks and growth mutual funds), think like an investor. Savers can expect no loss of principal and regular interest payments.  Investors must accept a potential loss of principal and irregular payouts.


  • Target Your Goals-Match the time frame of financial goals to investment characteristics.  Stocks have historically outperformed other investments over long time periods and are recommended for long-term goals like retirement.  On the other hand, stocks are very volatile and often lose value during short time frames.  If a financial goal is less than three to five years away, select alternative investments such as Treasury securities and certificates of deposit (CDs).


  • Dollar-Cost Average Investment Purchases-Making regularly scheduled investment deposits is a good way to reduce the emotions associated with investing. It also helps to reduce market timing risk. Mutual funds are ideally suited for dollar cost averaging.  Simply invest a fixed amount (e.g., $100) at a regular time interval (e.g., monthly) via payroll deduction or automated deposits.


  • Take Advantage of Tax-Advantaged Investments-Examples include municipal bonds, individual retirement accounts (IRAs), rental real estate, tax-deferred employer retirement plans (e.g., 401 (k) and 403(b) plans), annuities, and the purchase of a home.


  • Review Your Investment Risk Tolerance– Consider how much loss of investment principal (e.g., 20%) you could stand without losing sleep. Never invest in products you don’t understand or feel comfortable with.If you can’t explain an investment simply to a friend, you probably don’t understand it well yourself. Take this Rutgers Cooperative Extension quiz to assess your feelings about investment risk:


  • Consider Tax-Exempt Securities-An example is municipal bonds, if they provide a higher after-tax return than taxable securities.  Divide the available tax-exempt rate by1 minus your tax bracket (e.g., 15%, 28%). This provides its taxable equivalent. For example, a 5% tax-exempt bond provides the equivalent of 6.94% (5 divided by .72) to persons paying the 28% federal income tax rate.  If taxable investments pay less than 6.94%, buy a tax-exempt investment.


  • Diversify Your Investment Portfolio-Purchase different types of investments (e.g., stocks, bonds, cash assets) and different securities within each category (e.g., stocks from different industry sectors such as health care, transportation, and technology). Another way to diversify is to buy shares of exchange-traded funds (ETFs) or mutual funds that contain many different securities.


  • Increase Your Investment Knowledge- Helpful information can be found in periodicals such as Kiplinger’s Personal Finance, Money, and The Wall Street Journal.Other investment information sources include certified financial planners, adult education courses, investment clubs financial Twitter chats, and the online Cooperative Extension Investing for Your Future home study course:


Check out our Archived Monthly Investing Messages