Making Your First Investments means deciding your goals and determining how much risk you’re willing to take.

Investing is really only done for one reason – you want to earn more on your funds than what you can earn by leaving your money in your savings account or insured Certificates of Deposit at your bank or credit union.

Investing in stocks (equities) or bonds (fixed income) involves risk. There is the risk that the value of stocks you own may go down and there is risk that the bonds may quit paying interest, may not be repaid on maturity or that their values may decline while you own them. You decide to take those risks in the hope that the increased return (more than what you can get on a CD) justifies the risk.

It does not always work out that way, but over time, the average returns of equities and fixed income investments have been better than the returns of lower risk (or guaranteed no-risk) ways of investing. Here is some information to help you put the risk/return consideration into perspective.

The actual mechanics of investing can be a bit complex, mainly because different types of investments are handled differently and because there are different types of companies you can choose to make investments through. Here are some of the basics:

Buying stock through a stock broker – You tell your broker to buy 100 shares of XYZ stock at a certain price. The broker sends that order to the New York Stock Exchange (NYSE) and the order is executed very quickly (usually within seconds or minutes). If the stock is traded on the NASDQ (over the counter market), the broker sends the order to a trading desk and the order is executed.

Buying a stock online without a broker – You provide the details of the purchase online and the order is sent to the NYSE or a NASDQ trading desk and the order is executed.

Buying a mutual fund through a stock broker – You tell your broker to buy a certain number of shares or a certain dollar amount of a mutual fund. The broker sends the order and the order is executed at that day’s closing price.

Buying a mutual fund directly from the mutual fund company – You can usually do this over the phone or online with the order executed at that day’s closing price.

Creating a beginning investment strategy

First, understand that investing should be a long-term process. Markets fluctuate and you should try to have at least a 5 to 10 year time horizon for your investments. That is not to say that you should hold all your investments for that long, but if you expect to need your investment funds in the near term, perhaps you should keep your funds in more liquid and safer forms.

Next, you should practice diversification. Diversification means that you should not have too much of your money in any one particular investment. Many professionals suggest that you own stocks in at least 5 industries with 2 or 3 stocks within each of those industries. That way, you are not overly exposed to one part of the economy or any one company.

You should also consider how you divide your investments among different types of investments. How you divide your investments among stocks, bonds and cash investments is called asset allocation. It can serve as a logical starting point for your investment strategy. Individuals should base their asset allocation on their time horizon and risk tolerance. Here are some sample allocations based on age.

Sample Asset Allocations

You will note that the chart shows younger individuals having more stocks with the percentage being reduced over time. This is only logical. While you are younger, you can take a longer term approach – you have more time to recover from declines in your investments and you have more time to try to participate in the long term performance trends of different types of investments.

The numbers in this chart are only sample guidelines and you may want to vary from them depending on your feelings about risk and other aspects of your situation.

Deciding what to buy

Choosing individual stocks to buy is often the most difficult part of the investment process. You want to buy stocks that will go up in value, but there are no guarantees. Thousands of professionals spend their entire careers trying to find those winners. There are many books and evaluation services available that can help you learn to make better choices.

Another way to invest in equities is through mutual funds. »The concept of a mutual fund is quite simple. A mutual fund is a company that makes investments in other companies. You buy shares in the mutual fund. Your money is pooled with money of other investors and the mutual fund buys a diversified portfolio of stocks or bonds of other companies. The investment manager, or portfolio manager, is responsible for the buy, sell and hold decisions of the fund.

Your benefits include any distributions the fund makes from interest or dividends it receives and distributions of the fund’s realized capital gains. You can usually have any distributions made to you in cash or reinvested for additional shares. You also have the benefit of rising mutual fund share prices if the values of the underlying portfolio rise. However, if the value of the underlying portfolio falls, the value of your mutual fund shares will fall as well.

As with individual stocks, some will perform better than others. And even the best managed mutual fund will probably go down in value if the overall stock market falls. Even though past performance is no guarantee of future results, be sure to examine a fund’s performance and level of expenses before you consider buying it.

This article is meant to be educational only. Every individual must consider his or her specific situation when making investment decisions. The services of a qualified professional can help in this process. Remember, past performance is no guarantee of future results.

No matter where you are in life, know that Coastal’s Trust and Investment Services team is prepared to give you the information and resources you need to make good financial decisions. We offer free financial seminars and our financial advisors » are ALWAYS ready to help you make good decisions about investing and your financial future.