How to get started investing

Q: I have saved about $1,500 and I want to start investing. Is there any good advice, books, or stocks you can point me to?
A: Welcome to the exciting world of investing. As you'll soon learn, becoming a good investor is not unlike trying to become a solid surfer or football player. It doesn't take long to learn the very basics, but to really get good, it takes years and years of practice, dedication and study.
Before getting into a few suggestion on how to get started, I first wanted to impart the good news. I'm glad to see that you've already succeeded at one of the most difficult parts of investing: saving money. Having the discipline to clip coupons or give up that $2 cup of coffee every morning is the first step. After all, you need money to make money.
But now that you have your savings plan in place, it's time to take it to the next level.
The first decision you have to make is: What kind of investor do you want to be? Do you think you can outsmart other players on Wall Street? Do you think you can find outstanding stocks that are being ignored by other investors? Are you willing to spend your weekends and extra time researching stocks and studying about investing? If the answers to these questions are all yes, then you are what's called an active investor. If you answered most of the questions with a no, then you're a passive investor.
Now that you'd identified the kind of investor you are, then it's time to put together a game plan. We'll start with the passive investor first. Again, a passive investor is one who doesn't really want to spend the time learning about investing or doubts he can beat the millions of other stock investors. The passive investor simply wants to get the average return for a given amount of risk. This can be done very easily now, by buying mutual funds, index funds and exchange-traded funds that track certain asset classes.
For instance, let's say you're a 20-year-old who doesn't have any near-term needs for cash. You could afford to be pretty aggressive in that case. You'll want to put your money into a variety of investments, such as the Standard & Poor's 500 exchange-traded fund (which trades by the symbol SPY) as well as a number of funds that track small-cap companies. But how do you decide where to spread your cash? There are plenty of tools that can help you. A great resource is ifa.com. It's a great site because it not only explains the beauty of passive investing, but also has a tool that helps you decide what types of indexes you should invest in, based on your expectations and appetite for risk. The good thing about passive investing is that you put your money into the indexes and forget about it.
So what if you want to be an active investor? Well, this will going to take more work. This type of investor uses research, homework and smarts to find stocks that are undervalued. This will take much more work and could be frustrating, since most active investors under-perform similar indexes. That's not to discourage you, though, since skillful active investing is possible.
First, you'll need to get acquainted with financial statements. This is important because accounting is the language in which financial information is communicated. There are many books on this topic, but one of the best I've found is Analysis of Financial Statements by Leopold A. Bernstein and John Wild. It's fairly easy to read and does a good job explaining the parts of financial statements that investors need to know about.
That's a good start. But to be an active investor, you need to decide what your strategy will be. Do you want to be a momentum investor? These investors think stocks that are rising have something going for them and could be a harbinger for future outperformance. These types of investors also look for accelerating earnings, because that's a sign the company has tapped a new product or innovation that could power earnings. One of the best books on this method of investing is How to Make Money In Stocks: A Winning System in Good Times or Bad, by William J. O'Neil. In the book, O'Neil explains his "CANSLIM" approach to picking stocks, which is based on a number of factors including stock price behavior and earnings growth.
If that type of investing seems too aggressive, and you want something that's based on a company's value, there are several options for you. A great methodology is one advocated by the National Association of Investors Corporation. Their methodology is very intelligent and comprehensive, but still easy to learn and apply. You can learn more about the NAIC approach at better-investing.org.
Lastly, are you a bargain-hunter investor? Do you want to buy battered stocks like Kmart that get left for dead only to recover and rally. The bible for such deep value investors is the classic Security Analysis: The Classic 1940 Edition, by Benjamin Graham and David Dodd. It shows you how to find bargains in the stock market.
Lastly, there are some lessons that can be applied to any type of investors. One of the best lessons is the importance of never letting losses get too big, which is the 10% rule you refer to in your question. Again, you should never let a stock fall more than 10% below your purchase price. Lessons like these and more are contained in the classic Battle for Investment Survival by Gerald Loeb.
Good luck!
Posted from: www.usatoday.com