Choosing basic investments

time-tested rules of the game
Keep these time-tested rules in mind when choosing your first investments:

1. Diversify. To control risks, have a wide range of investments. The easiest way for the smaller investor to do this is to invest in a mutual fund, which contains a mix of stocks, bonds, or other types of investments (see the Mutual Funds section, below).

2. Simplify. It is difficult to track a lot of investments. Choose a limited number and check their performance regularly.

3. Stay steady. Trying to "time" the market with frequent buying and selling is usually a losing game. Even experienced investment professionals cannot predict when the market will rise or fall. Pick a plan with a risk and reward level that meets your needs, and stick with it. Contributing a consistent amount each month averages out the cost and minimizes risk.

4. Control your expectations. Don't expect to double your money overnight. If someone promises you regular double- or triple-digit earnings, watch out! It could be a scam or a risky investment. Even legitimate investments paying high returns probably won't keep up that pace forever. If your investments earn a regular average in the range of 3% to 8% a year, over a 5 to 10 year period, you can feel pretty good about your choices.

5. Avoiding any kind of risk is risky. Buying only the safest investments will not earn much money. This is because the safest kinds of investment products often have lower returns. As time goes by, the purchasing power of your money will go down, as the cost of living goes up - and as earning power goes down in older years. You can manage this problem by choosing a mix of investment products with different levels of risk. This kind of balanced approach will help you generate better returns, and keep risk factors moderate, so that you can get the most for your investment dollar.

6. Who should inherit and control the money? With some investments, the provider may ask you to name a "beneficiary" who will inherit the money upon your death. Be sure the named beneficiary doesn't conflict with your will. If you change your mind about who you want as beneficiary, notify your investment company in writing. Anyone sharing an investment account with you as a "joint tenant" - such as a spouse - may have legal rights to the money. Be careful, and make sure you set up new investment accounts to carry out your wishes. If you have more than one or two beneficiaries, or if your heirs live in another country, you may want to consult an attorney with expertise in this area, to ensure that you make the best possible arrangements for your investments. Local "bar" associations for professional attorneys often have free or low-cost referral services that can help you find qualified legal help.

7. Check out the tax effect of your investment. Your true profit on any investment is the amount you earn, less the taxes you have to pay. Different kinds of financial products may be taxable in different ways. Some financial investments may impose a higher or more frequent tax burden than others. Taxes may be due near the time of initial investment, be payable on earnings during the investment period, or be due at the time you withdraw funds. Before you invest in a financial product, ask the provider to give you complete details about how much - and when - the profits will be taxed.

You are in control

  Don't be afraid that you will get locked into an investment plan. You are in control of your money. Choose an investment program that will allow you to stop investing - or withdraw money - in case of an emergency. Be sure to ask the provider for details about this before you invest. An easy way to increase your contribution: arrange for your next raise to go right into your investment account.