Personal Finance Chapter 11

Personal Finance Chapter 11 - baj01275_c11_278-306 2/09/07...

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Starting Point Go to www.wiley.com/college/bajtelsmit to assess your knowledge of investing. Determine where you need to concentrate your effort. What You’ll Learn in This Chapter Appropriate investment goals The risk/return trade-off Passive and active investing strategies After Studying This Chapter, You’ll Be Able To Develop realistic investment goals consistent with your financial plan, risk tolerance, and life stage Compare and contrast your investment alternatives Assess the asset allocation and diversification of your portfolio Decide whether you will be an active or passive investor and what your primary investment strategy will be 11 INVESTMENT BASICS Investing Wisely baj01275_c11_278-306 2/09/07 02:10am Page 278
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11.1 DEVELOPING REALISTIC INVESTMENT GOALS 279 INTRODUCTION Today, thousands of possible investments compete for your cash, and it’s easy to make bad choices. To avoid costly mistakes, you should make sure your per- sonal financial plan includes a plan for developing investment knowledge and for taking an active role in household investment decisions. To accumulate the funds to achieve your goals, you need to save and invest on a regular basis. This requires that you stick to a budget, and it also requires that you make informed investment decisions. Over time, compound interest can help your savings grow. In addition, the more you can earn on your investments, the more quickly your savings will grow. If you leave all your money in low-interest bank savings accounts, it will take much longer to build wealth than if you put money in higher-interest investments. In this chapter, we look at the basics of investing. We first examine the process of setting investment goals and then consider some fundamental invest- ment concepts. This chapter also provides a broad overview of the investment alternatives available. 11.1 Developing Realistic Investment Goals In investing, as in other areas of your financial plan, you need to set specific goals that are realistic and within your control. Because you invest in order to accumulate funds to meet other household objectives, your investment process should begin with a reevaluation of your overall plan. Have you established the necessary foundation elements of your plan, prioritized your financial goals, and developed a budget that will allow you to set aside sufficient funds for investing? If so, you can move ahead in the investment planning process. 11.1.1 Establishing a Firm Foundation Although it might sound like fun to jump right in and start investing, there are a few things you should take care of first. Before you begin to develop an investment plan, you should make sure you have a secure foundation to build on. To see if you’re ready for this step, you need to ask yourself the following questions: Have I established my financial goals? Am I living within my budget and meeting my basic needs?
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Personal Finance Chapter 11 - baj01275_c11_278-306 2/09/07...

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