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Money Matters
The Informed Investor: First Steps
By Carlos Vega Cumberland

Welcome Today's investment product markets are rapidly growing: stocks, bonds, mutual funds, hedge funds, options, and CDs, to name only a few, are all products offered to enhance an investment portfolio. These investment alternatives are becoming more readily available to the knowledgeable investor, but what if you are new to the idea of investing your hard earned dollars? Where do you begin?

The first step - and perhaps the most important one - is to get rid of your high-interest debts such as credit cards. Why? Because of the principle of compounding, a dollar of debt will very rapidly compound into a several hundred dollars of debt, therefore working against you when attempting to make your assets grow.

As a result, your first goal should be to pay down all of your high-interest debt. Arguably, some kinds of debt may be low-interest or tax-advantageous (such as your mortgage), however, the rule of thumb still remains: be free of high-interest debt when you begin to invest.

The second step is to establish your investment goals, including 1) Time: long or short term? 2) Risk: speculative or conservative? and 3) Diversification: which investment products to choose? It is important to mention that a healthy investment portfolio should consist of shares, bonds, properties and managed futures.

Having said this, we turn to the basic concepts of investing. The income from an investment is called a “Return;” the financial outcome achieved by risking your money in the market is therefore known as "rate of return.” On the other hand, “Risk” refers to the uncertainty that you will receive an expected return on your investment. Risk is expressed in terms of volatility; some investments such as government bonds have a low volatility due to minimum fluctuations, so the risk of loosing money is minimized - but so is the return. On the other hand stocks, for example, have a greater volatility due to rapid rises and falls in price.

If you understand the concepts of risk and return, you will be better prepared to choose an investment product suitable for your financial goals.

Remember: in order to achieve higher returns, you have to be willing to take higher risks. If you consider yourself as a conservative investor, your returns may be relatively lower, but so will the volatility.

No matter what you choose to invest in, you must keep in mind what your investment goals are, as well as the risk you are able to assume. Once you have those defined, you can look into which investment products meets your financial objectives.

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