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There are several steps you should take before you invest. Remember the top half of the investment hourglass: before you invest, you should (1) be square with the Lord, (2) have adequate health and life insurance to care for the needs of your family in the event that something were to happen to you, (3) be out of credit card and consumer debt, and (4) have a well-written and well-thought-out investment plan. These steps help you prepare a “priorities-based” investment plan; in this plan, God comes first, then family, then personal responsibility and accountability, and then investments. There is no better way to start investing than to have your priorities in order.

I approach the topic of investments differently than other textbooks. Most books take an asset-based approach. In other words, they discuss stocks, bonds, mutual funds, and other assets; these assets will change over time as new assets are developed and sold. I take a principles-based approach because the principles of good investing will not change over time. There are important investing principles that, if followed, will result in a quality investment plan and lead to a successful investment portfolio. The principles are the following:

  1. Know yourself.
  2. Understand risk.
  3. Stay diversified.
  4. Invest low-cost and tax-efficiently.
  5. Invest for the long run.
  6. Use caution if you must invest in individual assets.
  7. Monitor portfolio performance against benchmarks.
  8. Don’t waste too much time and energy trying to beat the market.
  9. Invest only with people and institutions that are high-quality, licensed, and reputable.
  10. Develop a good investment plan and follow it closely.

Investment is similar to an amusement park. At an amusement park, people go on rides that appeal to them; likewise, in the area of investment, people invest in areas that suit them. The key to investing is to find out which rides you like, based on your age, your goals, your budget, and, for some, your medical history.

Asset classes broadly categorize investments with specific and similar risk and return characteristics. Asset classes are categorized by the characteristics that are unique to particular groups of securities, such as type of financial instrument, market capitalization, maturity, and geographic location. The major asset classes are cash and cash equivalents, fixed-income investments (bonds), and equities (stocks).

From Table 18.1, we note several important aspects of successful investing. First, each asset class has very different return and risk characteristics. When you build your portfolio, you should take these characteristics into account. Second, as a general rule, the higher the return, the higher the risk. When you build your portfolio, you are not just trying to plan for a higher return, but a lower risk as well. Third, while equities are volatile on a monthly basis, the bad periods are offset by the good periods over time. Generally, the longer the time period, the greater the likelihood of positive returns. And finally, if you want your portfolio to grow faster than taxes and inflation, you should consider making stocks an important part of your portfolio.


Now that you have completed this section, ask yourself the following questions:

  1. Do you know the steps you should take before you invest?
  2. Can you recognize the ten principles of successful investing?
  3. Do you understand the risk and return history of the major asset classes?
  4. Do you understand the risks and benefits of the major asset classes?

If you can answer yes to each of these questions, you are ready to move on to the next section!


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