Investing - 2 sections for 2 types of investors:

• Section I - If you already have money in investments products such as savings accounts, CDs, mutual funds, annuities, stocks and/or bonds; compare your current investment's returns with the best available investment's returns.

• Section II - If you're new to investing; learn how to be your own investment advisor.

Section I. Compare Your Current Investment's Returns

0. Look at your most recent brokerage account statements.
0. Find the column that lists the symbols of your investments.
0. Go to www.morningstar.com
0. Look for a box at the top of the page that says Stock/Fund Go.
0. Type in one of your symbols in the box, then click on Go.
0. You'll see a lot of information; just look for Category and Performance.
0. Compare the performance of your investments within the same asset class category.

Section II. Every Investor's Checklist

1) Before you invest any money, you should have created a list of your financial goals, completed a budget, reviewed your living expenses, identified how much money you can afford to save every month and have a net worth statement.  These were explained in the Planning section.

2) Each of your financial goals should be listed as a separate account under the assets section of your net worth statement and have the following information:

• Current $ Amt = the amount of money currently saved for this goal
• Target $ Amt = the total amount of money you need for this goal
• Time Horizon = when you will need this goal's money
• Monthly $ Amt = how much you need to save every month to reach the goal.

• Here's an example net worth (your list of assets should not look much different, only the amounts should be different):

To calculate the Monthly $ Amt (amount) you need to save for a goal, use this free calculator. 

• The savings goal = your Target $ Amt
• Years to save = your Time Horizon
• Amount currently saved = your Current $ Amt
• Monthly savings = enter any amount, the calculator will calculate the amount for you
• Expected Inflation Rate - explained on the Planning webpage, just enter 0% for this
• Expected Rate of Return - see below

Saving money is not the same as investing money. Saving means putting your money into bank savings accounts or CDs.  These are not good investments due to low interest rates paid by banks, typically only 1-4% (current interest rate depends on the economy). Investing means putting your money into investments that pay a higher return than bank savings accounts.

The time horizon of a financial goal is one of the primary considerations that determines how you will invest for that goal, which in turn impacts the expected rate of return you will earn. As a result, in the savings goal calculator, use the following expected rates of returns:

• For goals with 12 months (1 year or less): 2%
• For goals with 12 to 36 months (1-3 years): 5%
• For goals with 36 to 60 months (3-5 years): 7%
• For goals with 60 to 84 months (5-7 years): 8.5%
• For goals with 84 to 120 months (7-10 years): 10%
• For goals with 120+ months (10+ years): 12%

3) Understand The Rate of Return You Are Earning on Your Money

If you don’t know what average annual rate of return you are earning on your money, it will cost you a lot of money over your investing lifetime. Say you can save and invest $500 a month, look at the impact of earning different rates of return over time:

• On the banking webpage, it was explained that checking accounts should only maintain enough money to pay your most common bills and that savings accounts should only maintain your emergency fund (3-6 months of living expenses in the event you need money for an emergency).

• To determine how much emergency savings you need, use this free calculator

4) Understand Investing Risks

Risk is very complicated to explain because there are so many investing risks, such as: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk and event risk.

When the term "risk" is mentioned, most investors and advisors refer to volatility or the variability of returns from year to year. Investors who avoid risk in an effort to be “conservative” may find that their investments don't increase in value enough to cover higher costs of living in retirement. 

Here's what you need to know about risk:

• Risk exists in many forms and you have to accept some risk in order to grow your money.

• Avoiding risk can expose you to the greatest risk of all - outliving your money.

• Risk can best be quantified (how much risk) by a mathematical term called the "standard deviation".  In simplest terms, the higher the standard deviation, the higher the volatility or variability of returns from year to year.

• Example #1: Mutual Fund A annual return is 10% a year with a standard deviation of 20%.  This means this fund's annual returns range from up 50% to down 30% in any given year.

• Example #2: Mutual Fund B annual return is 10% a year with a standard deviation of 30%.  This means this fund's annual returns range from up 70% to down 50% in any given year.  Same annual return as Mutual Fund A, but with more risk.

5) Determine Your Investment Risk Tolerance

The purpose of investing is to make as much money as possible while not taking on so much risk that you can’t sleep at night. If your investments lose 50% of their value, it takes a 100% return just too breakeven. Once you understand risk, you will be a successful investor. So, what is your investment risk tolerance?  Find out from this risk profile questionnaire, by clicking here.

6) Design your investment strategy (asset allocation).  

This means diversifying your portfolio into different investments (a.k.a. asset classes) such as cash, bonds, stocks, real estate and commodities to balance risk and return in pursuit of your targeted long-term average rate of return identified in the risk tolerance questionnaire.  To understand the volatility of performance from year-to-year of different asset classes, view the Callan Table. Spreading your money in these asset classes will reduce the ups and downs of your portfolio. Over 90% of a portfolio’s return is determined by asset allocation, not by the selection of individual stocks and bonds.

7) Give your money to the best money managers within each asset class. 

There are basically three options when it comes to investing: a) you can select stocks and bonds with low costs; b) you can hire a broker to select stocks, bonds and/or other packaged investment products with high costs; c) you can hire professional money managers to select individual stocks and bonds within each asset class with reasonable costs.

• Most people do not have the time, confidence, discipline or skill to buy and sell stocks and bonds on their own successfully. Giving your money to a broker is expensive with their high commissions and transaction markups/downs.  Ask yourself this: "If mutual fund research proves that the money managers of the brokerage firm’s mutual funds have below average long-term returns, how much better can their brokers do buying and selling stocks and bonds for their clients?"  When you give your money to professional money managers, you get these benefits:

• Save time - Spend more time with family and friends, not “managing your money”
• Diversification - Easy access to foreign markets and to different asset classes
• Performance - Public performance records can identify the best managers
• Comparisons - You can compare money managers side by side
• Manage Risk - You can build a portfolio to match your risk

• How do you select the best money managers? It's managers who have proven and long-term risk-adjusted returns above their respective market benchmark (i.e., Large-Cap, Mid-Cap, Small-Cap Index) and their competitors in the same asset class.

• Not giving your money to the best money managers will cost you a lot of money over your investing lifetime.  For example, Manager A has an average return of 10%, but Manager B has an average annual return of 14%.  If the future hold true as the past, it will take every 7 yrs to double your money with Manager A instead of every 5 yrs with Manager B. This is called the Rule of 72, (72 divided by the rate-of-return).

8) Keep your costs low.  There are 4 costs associated with investing: 

• Hard-dollar costs are advisor and product fees & commissions that can add up to over 3% a year for many advisors; higher costs reduce your average return over your investing lifetime.  Remember the rule of 72, if the stock market's long term average return is 10% and you're netting only 7% due to costs, it will take 10 years to double your money at 7%; only 7 years at 10%.

• Performance cost is when you invest in an underperforming investment compared to a similar investment that has done or could do better; this cost will cost you much more than hard-dollar costs.

• Risk cost is when you invest in an investment with higher risk (i.e., potential downside) compared a similar investment with lower risk (potential downside). When the markets go through a bad period, higher risk investments typically go down in value more than lower risk investments; this cost will also cost you much more than hard-dollar costs.

• Tax cost is when you pay higher income taxes compared to lower capital gain taxes on your investments. An example of this would be annuities. Many advisors sell annuities and the tax deferral benefit, however this is misleading because when you sell part of the annuity to generate income, you will pay higher income tax rates on the annuity instead of lower capital gain tax rates on other investments sold.  Annuities are also taxed at income tax rates upon your death instead of passed to your heirs on a stepped-up cost basis as with  other investments. It is important to know your mutual fund after-tax performance in taxable accounts (all financial publications show mutual fund pre-tax performance figures).  You can see the differences in tax rates on the Taxes webpage

9) Monitor your money managers and portfolio. 

Ongoing monitoring is essential to ensure your recommended money managers are still providing value-added performance, your asset allocation is still within your risk tolerance and your portfolio's average rate-of-return is on track for meeting your financial goals.  If necessary, you should change managers and/or adjust your asset allocation.