Before you invest, you must have a clear understanding of why are you investing.

Investments must have a purpose and goals that are simple. It varies by individuals, but here are some examples.

• build up emergency funds
• be debt free in five years
• take at least one vacation a year
• have enough savings to buy a house in 10 years
• stop working when you’re 50 and comfortably live from your investment income
• it may be all the above

Financial stress and anxiety affects most people. Things happen in life that causes you stress or anxiety. One way you can certainly manage your financial stress and take charge of your financial future is by taking charge of your investments and savings. It is always good to start early but it is never too late.

You are not alone. Many successful and highly qualified professionals can experience many challenges when it comes to savings and investments. That is why many wealthy individuals go from millionaires to personal bankruptcies. Regardless of your profession and interests, every person should have adequate understanding of personal finances and should at least understand the basics.

Whatever your goals are, once you have set your goals, you need to figure out a way to financially achieve those objectives and make it happen!

Savings is most important and investing is one way to supercharge your savings so you can achieve your financial goals. Investing is not brain surgery, but it does require clarity, quantification, focus, process and some discipline. It’s no different than any other task that is important to you.

1. Clarity : all goals, financial or otherwise, must be clear and reasonably measurable. For instance, if you want to stop working when you’re 45 or 50 and live off of your savings, you need to quantify how much savings and recurring income (starting at 45 or 50) you will need. This recurring number could be $75,000 to $200,000 per year (inflation adjusted), or any number based on your lifestyle and requirements. You must have a clear target in mind.
2. Quantify : Once your goals are clear, it should be reasonably easy for you to quantify and articulate what you need to achieve in terms of savings and investing over time. Savings and investing are both interdependent. If you want to maximize your money over a reasonable time horizon you need to focus on both, preferably simultaneously. In practice this means figuring out how much money can you set aside initially for investments and how much can you contribute weekly or monthly to your savings and investments in order to achieve the goals you set earlier.
3. Focus : Both saving and investment require work and focus. Savings can come from either improving your income by getting a new job, reducing your ongoing expenses, or a combination of both. Today you have many options to develop new skills for enhancing your earnings as well as investment options. You need to find investments that truly meet your return and risk objectives. Bottom line, a clear goal as well as quantifying your requirements will not translate to anything unless you have focus. This is no different than having a plan to reduce weight and build muscle. If you never make it to the gym and continue to eat unhealthy food, you will never achieve your goals.

Commit yourself: unless a commitment is made, There are only promises and hope
Peter Drucker
Do your homework: by failing to prepare, you are preparing to fail
Benjamin Franklin

4. Process : Whether you want to improve your income, save more or make smart investments, it requires a process that works for you and is sustainable. Otherwise there is no point. The process should not be stressful and must be sustainable. If you’re trying to increase your income, you may find a second job. That means you need to have a process of learning new skills that are required for the new job. If you are trying save money on food, you must have a process of researching and acting upon it, so you can reduce your costs.
5. Discipline : Once you have set up your process, whether it is for savings or investments, you must be disciplined enough to follow a process that is suitable for you. The process may be daily, weekly or monthly.

Stop and before you invest a dime, you must have a clear understanding of what is required (pre-requisites) to achieve your goals.

Here are the first things that you need to think about.

1. How much can you invest upfront ?
2. How much can you realistically save on a monthly basis ?
3. When do you want to pay off your debt ?
4. What is your expected annual return on your investment required so that you can achieve your dreams ?

These can and are expected to change as you go through life but it is important to start any financial goal with these thoughts in mind.

So, there are at least 3 ways to increase the amount you get out of investing. The money you invest upfront and on a monthly basis, the rate of return, and how long you expect to keep your money invested. You have somewhat direct control over 2 of the drivers, the money you put and the time you keep your money invested. Investing favors people with patience. The rate of return isn’t guaranteed. There are years where you will make money and there are years where you will lose money. That’s okay. In the long run, the economy trends upward. For instance the S&P 500 has an historical average return of 11.4% since 1928 including the down years.

Important things to keep in mind…

No Pain No Gain (Risk Versus Reward)

All investments have risks. There is no reason to panic but if you do not take any risk then you will not get any returns of substance. The key is to take calculated risks (that are measurable) and being rewarded for the risk you take. Risk is the price you pay for returns. A diverse portfolio should include some investments with high potential along with relatively safer investments. The younger you are, the more risk you should be willing to take. Someone in their early twenties has another four decades to make money, as opposed to someone in their late fifties, who is gearing up for retirement. Having a diverse portfolio means more than just picking stocks from different sectors. You have to be willing to balance those big companies with more high potential investments. That will depend a lot on your tolerance for risk and your age should play a big part in this.

Long Term View pays off big time

When investing, it is best to think of the long term. It is extremely easy to get caught up in the day-to-day fluctuations and news. But in the long run day-to-day fluctuations don’t really matter. The performance of the S&P during a few down months does not really matter since the S&P has risen significantly over time. There aren’t any 15-year periods where the overall market has declined. All of us should think long term when investing.

However, we must always ask if the down month is a short-term event and does it impact the fundamentals of the business? In most cases the short-term volatility has no impact on fundamentals but not always. The longer your investing timeline is, the less you have to worry.

When you invest, you should expect to not touch the money for 5 to 7 years. 9 months or 3 quarters is considered a short recession. The financial crisis of 2008 lasted over 18 months. It is important to be able to think long term as economies bounce back, and when they do, people who are invested gain the most. If you have any big expenses coming up in the next year or two, you should keep it in cash or short-term investments such as Certificates of Deposits (CDs) or Money Market accounts.

Again, if your financial situation is complex and time sensitive, it may be time to seek professional help but remember time is the biggest ally you have in building wealth.

You MUST understand the following basic terms before you select a particular investment scheme or strategy.

1. Annualized Return : A measure of investment performance. This is often used to compare investment performance between different time periods, instruments or investment options. When you value the stock are an ETF you should always review Annualized Return over atleast 5 years.

   Here is an important calculation that you need to know when investing your money.

   Annualized Return = Your Money x (1+R) ^N
   Your money is the amount you can invest

   R is the expected rate of return
   N is how long you expect you keep your money invested

2. Cumulative Return: A measure of the total return from point A to point B. A cumulative return can span across many years. A cumulative return can be broken down into an Annualized Return.
3. Alpha: Alpha is also a measurement of performance. Specifically, Alpha is the active return on an investment, over a market index or a benchmark. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha. This is specifically important when you’re reviewing an actively managed fund. Alpha measures valued addition over the benchmark by the manager.

4. Standard Deviation (Risk): A statistical measure of the variability of monthly or quarterly returns. This is annualized to make it easier to compare with annualized returns. The higher the standard deviation, the greater the volatility or Risk of an asset or investment. Higher standard deviations mean greater fluctuations and higher uncertainty. Lower standard deviations mean lower fluctuations and higher certainty. You should always know the standard deviation of a stock or an ETF.
5. Value at Risk (daily): Value at risk (VaR) is very useful indicator and a measure of the risk of loss for investments. It estimates how much you might lose in a set time period such as a day assuming certain probability. VaR is typically used by professional investors, firms and regulators in the financial industry to measure the amount of assets needed to cover possible losses, however this is also useful for anyone investing in the stock market. Value at Risk he’s also a useful measurement of your daily risk. For instance, if your value at risk is 2% then you have certain probability that you could have a market move of -2% any day. This is important to know upfront so that you’re not surprised when market moves are within you VaR limits.
6. Asset Allocation: This is something to consider when investing. A diversified portfolio is created by dividing your funds among different asset classes such as stocks, bonds, international equities and short term-term cash instruments. When investing, it is important to consider which asset allocation is best suited for your needs.
7. Beta: A measure of the degree to which a stock’s return tracks the broader market. It is essentially a measure of another important risk factor and an important parameter to understand. Stocks with higher beta are considered more risky, and a stock with lower beta is considered less risky, obviously depending on your investment objectives. The S&P 500, which represents the broader market has a beta of 1. If Netflix (NFLX) has a beta of 1.35, then when S&P goes up 10%, NFLX will go up by 13.5% Think of beta as a multiplying factor.
8. Duration: A measure of the sensitivity of a bond or bond portfolio to changes in rates. The higher the duration, the greater the exposure to interest rate fluctuations.
9. Internal Rate of Return: The mathematical formula used to calculate dollar-weighted returns. In technical terms, this is the discount rate that makes the net present value of a defined set of cash flows equal to 0.
10. Return Risk Ratio: A measure of return for each unit of risk. This ratio expresses the amount of return achieved for each unit of risk assumed by the investor. The higher the ratio, the better the risk-adjusted performance. For instance, if the Annual Return is 10% and Standard Deviation (Risk) is 15%, then the Return Risk Ratio is 10%/15% = 0.667.
11. Sharpe Ratio: Similar to Return Risk Ratio, it is a measure of risk-adjusted performance. This ratio also expresses the amount of return achieved for each unit of risk assumed by the investor. The higher the ratio, the better the risk-adjusted performance. . For instance, if Annual Return is 10% and Standard Deviation (Risk) is 15%, and Risk Free Rate is 2% then Sharpe Ratio is (10%-2%) /15% = 0.553.
12. Total Return: The change in the value of an asset or portfolio due to both capital appreciation and depreciation. Dividends, interest payments and other income are factored into this calculation.

13. Normal Distribution: A normal distribution, sometimes called the bell curve, is a distribution (of returns in this case) that occurs and applies in many situations. Generally Stock Market returns are NOT normally distributed and dispersions or outsized returns both positive and negative can occur in the stock markets. Nevertheless, it is a useful tool for measuring risks and you can use the concepts of normal distribution to measure risk of a stock or your portfolio. For instance, if you’re stock has a 10% mean historical return (annualized) and a 10% annual standard deviation you should expect your returns to range between positive 30% (10% + 2 x 10%) and (10% - 2 x 10%) -10%, assuming normal distribution (2 Standard Deviation +/- from the Mean Return of 10%) which has approximately 95% probability. Meaning there is a 5% Probability that returns fall outside the range assuming normal Distribution.
    
    The range of returns for your investment is important to know upfront so that you’re not surprised and you can make a rational decision based market moves that is expected or unexpected given the historical performance of the stock or an ETF. In the event returns fall outside the range, you must investigate further the causes and drivers of such event and make a thoughtful decision either to sell or add depending on the specific situation.

Today you have many options for constructing a portfolio including Stocks, Bonds, Mutual funds and most importantly ETFs. However, before you construct a portfolio, you must know a few important facts.

First, the investment industry has been experiencing an unprecedented shift toward investing in passive investments, and since the launch of the first U.S. listed Exchange Traded Funds (ETFs) in 1993, this trend has only accelerated. Investors globally increasingly invest in ETFs for a variety of reasons, including as part of an overall investment strategy, for their lower cost structures, and the fact that most (not all) actively managed funds do not outperform the markets and indices over time.

ETF assets grew a whapping 3,000% in the past 15 years and now provide choices to fill the needs of investors from millennials to retirees. Over the last 10 years, ETF assets grew at least at an annualized rate of 24%, versus approximately 8% for Mutual Fund assets when compared to the same time period. There are currently more than 5,000 ETFs available for trading globally, and ETF assets are over $4.3 trillion and growing.

Second, it is very difficult (but not impossible) to consistently outperform the market (e.g. S&P 500 Index) for anyone. You may know already that roughly 1 in 20 actively managed domestic funds beat the index funds they track (according to Standard & Poor’s research). Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively. In other words, the odds you’ll do better than an index fund are close to 1 in 20 when picking an actively-managed domestic equity mutual fund.

Third, most experienced investment professionals know that there's no such thing as a strictly passive or active approach to investing. Rather, a thoughtful combination of active and passive strategies is required to consistently produce superior returns, over various market conditions.

Given all the above, most of us are probably better off investing in ETFs. ETFs are already replicating most investable assets globally, facilitating DIY investing – bypassing the needless intermediaries for the benefit of the investors. However, depending on your personal risk return expectations and investment sophistication, you can construct your own portfolio of stocks, bonds, mutual funds and ETFs. Below are brief descriptions of major instruments to consider.

1. Mutual Funds and ETFs: Mutual funds are entities that buy a diversified mix of stocks on behalf on their own shareholders. Mutual funds can be subdivided into two categories: active and passive. Actively managed funds make effort to buy stocks that will do better than the overall market, whilst still maintaining ownership over diversified portfolios. Contrastingly, passive funds, also called index funds, are mutual funds that are specifically focused on achieving positive beta returns.
   
   Exchange Traded Funds (ETFs) are index funds traded on an exchange, in similar manner to stocks. Investing in ETFs holds a number benefits and detriments that should be considered prior to doing so. The key benefits of ETFs include easy access, lower fees, liquidity, tax advantages, and today, there are many brokerages offer a number of commission-free ETFs.
2. Stocks: Stocks are financial assets that represent fractional ownership in actual companies. Investors in stocks can expect to make a return on their investment in two different ways: Dividends (from company Earnings) and Capital Gains. Dividends are the payments (Monthly, Quarterly or Annually) to shareholders that represent earnings paid to owners of a given company, and Capital Gains are profit earned when a shareowner sells a stock for a higher price than the purchase price.
   
   Today you can buy domestic or international stocks. When you invest in Domestic stocks whose earnings are mostly in dollars (not always), there is less currency risk compared to investing in companies overseas. US, domestic stocks are the stocks of companies that can typically be found on the NYSE or the NASDAQ market. International stocks include developed market stocks that are based in companies located in foreign locales such as Europe, Australia, and Japan. Internationals Stocks also include Emerging markets stocks from countries like China, India, and Brazil.
3. Bonds: Bonds are investment in a company or entity that is obligated to pay certain ongoing interest and payment of principal at certain maturity or expiration date, which is different than stocks since there is no such promise. Bonds are generally a safer investment (not always) than stocks, but typically carry far less potential for larger returns. The primary risk for Bonds are Default Risk that include bankruptcy or other events under which the company or the entity is unable to meet its payment obligations (timely payment of Interest and Principal). Bondholders do hold priority claim from the company’s assets, so they will be reimbursed for their full investment prior to stockholders receiving anything. Bonds also have Interest Rate Risk, which is impacted by changes in interest rate. Interest Risk primarily impacts the investor if you are trading the Bond prior to maturity.
   
   There are many different types of Bonds and the underlying structure and compositions can differ materially. The different categories include treasury bonds, municipal bonds, corporate bonds, and mortgage-backed securities.
   
   United States Treasury bonds are safest, since it is guaranteed by the US government and safe from risk of Default. Municipal bonds are obligations of States and Municipalities, typically issued to finance short term or long term expenses. Municipal bonds are tax-free bonds and can be an attractive investment for individuals. The corporate bonds carry higher interest and carry more risks compared to government bonds. This risk of investing in corporate bonds is that there is always a chance that a company will go bankrupt (Default Risk). Mortgage backed bonds, are backed by Mortgages meaning that they have been used to finance mortgages for purchases of homes. Mortgage backed bonds carry pre-payment risks in addition to Default as well as Interest Rate Risks.
4. REITs: Real Estate Investment Trusts (REITs) are traded as stocks. REITs hold ownership over properties including apartments, malls, and offices. They generate money from underlying monthly payments from residential properties. The majority of the profits made from this exchange are required by the agreement to be paid to the shareholders of the REIT via dividends. Key advantages enjoyed by investors in REITs are the tax efficiencies and the fact that REIT profits are not charged under corporate income taxes.
5. Preffered stocks or bonds: A preferred stock is a type of ownership in a company that has a priority claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has also has the potential to appreciate in price. The details of each preferred stock depend on its terms and conditions. These instruments (price movements) in most cases behave differently compared to stocks and bonds meaning it has less relative correlations with the broader markets primarily due to its position in the capital structure of the company.
6. Commodities: Commodities are dissimilar from the other assets discussed above in that they are actual physical resources such as gold, minerals, oil. To invest in commodities, individuals can acquire portions of funds investing in these commodities via ETFs. These funds mimic the process of buying and holding the commodities through Futures contracts.

Risk Assets or investments, include any assets that have a reasonable probability of depreciation as well as appreciation in value. These include Stocks, Bonds, Commodities, etc. Conversely Risk Free Assets or Investments include short dated government bond or certificate of deposit (CD) that are generally considered to be free from risk of monetary loss and may be used as a benchmark for evaluating investment performance.

As mentioned earlier, ETFs are already replicating most investable assets globally, facilitating DIY investing – bypassing the needless intermediaries for the benefit of the investors. Therefore, anything not covered above most likely can be invested through the ever-growing ETFs that anyone should consider.

In order to invest, you need to open a brokerage account. Today you have many options, even including Commission free trading offered by certain brokers (e.g. Robinhood) as well as many options for your 401k, which is a retirement account that is made available by ones employer.

In most cases the brokerage industry is fairly competitive, however commissions and fees could be different depending on the type of accounts and services you desire. In order to evaluate which brokerage account is suitable for you, you can compare commission per trade, monthly maintenance, access to online tools, minimum account size, etc. across multiple brokers and pick one that suits your need.

• Discount brokerages are cheap and offer a wide range of investment options. Examples of discount brokerages are low cost online accounts, such as E*Trade, Charles Schwab, and Fidelity. These discount brokerages allow independent, individual investors to purchase a variety of common stocks, mutual funds, and exchange-traded funds (ETFs).
• In addition, a few mutual fund companies (T. Rowe Price and Vanguard) allow investors to purchase funds sold by a parent company, but the mutual funds don’t enable them to directly purchase stocks. Although this is the norm, certain larger fund families may, at times, offer discount brokerage options. Mutual funds are typically more attractive to investors that look towards professional management capabilities. They also, however, generally come with higher fees that can lead to dramatically lower returns in the long term.
• Full service brokerage accounts, such as Morgan Stanley, JP Morgan, and Goldman Sachs, are similar to discount brokerages but they offer more specialized and personalized services, including wealth management and advisement. These accounts, however, charge significantly more than discount brokerages, and hence are typically only utilized by those who are fairly financially comfortable.

These accounts appeal most to those that are seeking an investment adviser. If you are to use an advisor, although doing so is both unnecessary and costly, it is better to seek one that is regulated as a registered investment advisor (RIA). If you utilize an advisor who isn’t regulated as such, you risk them giving you bad advice, so as to allow them to obtain kickbacks or commissions from investments that are unsatisfactory for you.

The 401(k) Account

The 401(k) is a retirement account that is made available by ones employer. Typically, employees must elect to have a portion of their wages deducted directly from their paycheck (sometimes referred to as the direct contribution plan).

There are material benefits of 401(k) accounts and if available, one must take full advantage of such options provided by an employer. For 401(k) accounts, employers may automatically “match a portion of the contribution”, giving free money to the employee. For instance, if an employer matches up to 100% of the first 8% of employee income, and the employee and the employee invests $4800 in their 401(k), they will make gains of $4800 annually. Over a 20-year period of time, if this rate is maintained, the employee will have made $96000 in profit by the age of 50 without having done anything.

Employees can also deduct their contributions from income before calculating taxes. For instance, if the employee were to deposit $5000 in their 401(k) on a salary of $60,000, when the employees’ income tax would be calculated, it would be held against $55,000 as opposed to $60,000. Furthermore, this may place the employee in a lower tax bracket than if the tax included his initial income, perhaps allowing them to pay an even lower percentage. Employee investments that remain within the 401(k) account will be able grow completely tax-free so long as they remain there.

However, there are also a number of liabilities that are attached to the storage of income in a 401(k) account. 401(k) accounts do not allow you to withdraw from them until you turn 60. Hence, they do not allow short term spending goals to be achieved, as Employees will face severe tax penalties if they need to withdraw any money from their 401(k) before they turn 60. In this case, Employee’s will be taxed on retirement withdrawals from their account at an ordinary income rate. Also such withdrawals will likely be limited to a set approved amount by the employer.

The IRA (Individual retirement account)

The IRA is an account produced by the government for the objective of pressuring individuals to save for retirement separate from the 401(k), or other employer related systems. A traditional IRA has the same tax advantages as a 401(k), but it is entirely self-managed, so it lacks the constraints in investment selection compared to the 401(k).

The IRA has two Core Holdings weaknesses; for many people, contributions are only fully tax-deductible for those with an income below $56,000. The contribution limit on a traditional IRA is significantly lower than a 401(k), meaning there is only a limited annual amount of money that can be invested in it.

Ideally, an individual would have all 3 accounts (401k, IRA, Normal), which would allow them to reap the benefits of each particular one, and to use the diversification of the accounts to their advantage.