People often ask me “when is the best time to invest money”, or “is now a good time to start investing my money”. Now, in 2014, may be the best time to invest or start investing money… but only if you have your ducks in a row.
Many people start investing money prematurely – before they have their financial house in order. Then, they continue investing until they either want their money back to buy something, need their money back to pay unexpected bills, or start losing money. In other words, they get started before they have their ducks in a row. Three factors will determine the best time to invest or start investing money. And, no, the best time to invest does not depend on the state of the economy or the trend of the stock market.
Before you start investing you should have a reliable source of income and a good cash reserve to cover financial emergencies as well as purchases you plan to make. Third, you should have a basic knowledge of financial terms as well as of stocks, bonds and mutual funds before you invest a serious (for you) amount of money. Even if you plan to use the services of a financial planner, you will need to be able to communicate with him or her.
Saving money to establish a cash reserve is the first step for many people. Once you start investing money for a long-term goal like retirement, you don’t want to interrupt the process because you ran low on cash. This can be costly, especially if your timing is bad and you need to liquidate with a loss.
The best time to invest is when you have your financial house in order. On the other hand, the best time to invest money in stocks, bonds, and mutual funds is another question. For example, 2014 might not be the best time to invest in stocks, or even bonds. But you need to make your money grow. That’s why you need to get a handle on mutual funds, and the process called asset allocation. Mutual funds are the best way to start investing money. They offer average investors professional money management, and a diversified portfolio, usually at a reasonable cost.
Asset allocation is the single most important consideration when you invest money. You want to spread your money across the asset classes in order to both make your money grow, and keep your risk moderate. Mutual funds make this easy to do. They offer stock funds, bond funds and money market funds. If you want to start investing in 2014 (or just start over) put equal amounts of money in a diversified (large-cap) stock fund, an intermediate-term bond fund, and a money market fund. This asset allocation is simple and should keep you out of serious trouble, even if 2014 turns out to be a rough year for investors.