Who: This post is for people who have read Investing 101 and Investing 102, regarding the basics investing. If you want to get started with investing and are not sure how, or just want a run down of the basics, the Investing series is for you.
What: This post discusses how to isolate your investment habits (this should be self evident.) In other words, this post will help you determine how often you should invest, how much, and how much time you’ll put into your investments.

[ Investing 101 | Investing 102 | Investing 104 | Investing 105 ]

I want to thank everyone that has stuck around and read the first 2 posts of this series. I know that the process of investing can seem slow and tedious, but once you have a solid foundation you can be assured that you will be much more well informed and in a better position to make decisions about your assets. Here we will continue with our theme… YOU (Congratulations on your TIME Person of the Year award as well…) We will talk more about your investing habits. Of course you don’t know what your investing habits are, because you haven’t even invested yet. That is the purpose of this post.

Frequency and Amount of Investments

The frequency of your investments is an important factor in determining exactly which types of investment vehicles you should be purchasing. Some investment vehicles have up front costs (loads or commissions) and are not very efficient to purchase in low quantities with a high frequency. Other investment vehicles have free cost of entry and have fees that get paid over time (i.e. expense ratios). These investment vehicles are great if you plan on making many investments over a moderate period of time.

So, how often will you be investing? Are you going to be a day trader? Are you going to maybe take a part of your paycheck every other week and invest that? Are you going to do it monthly or just wait until the end of the quarter and make your investments?

This information coupled with the amount you will invest makes a huge difference in determining which investment vehicles to choose. The general rule for commissions is that you want to calculate what percentage of the total trade the commission constitutes. You can then compare this with an expense ratio of a mutual fund that doesn’t charge you up front, but charges you over time. All of this will be discussed in Investing 104, so just try to figure out what makes the most sense for you, and we’ll translate that into ideas about what types of investments to purchase.

So, how often will you make purchases?
How big will the purchases be?

Research Time Invested

The second important factor in figuring out your investment habits is easy to figure out. How much do you know about stocks, bonds, financial instruments and research? Do you want to learn about them? How much time do you want to put in to select investments?

If you have a lot of time to look through your investments and select based on research, then you may be interested in individual stocks, bonds, or mutual funds more than you would be if you didn’t have time. For example, if you have plenty of free time to read about securities, you can make a more informed decision about which stocks and bonds to purchase. Many times, a particular asset class will outperform other asset classes over a period of time. This can easily throw your allocation out of whack. You’ll need to re-balance your allocation. If you don’t have time to do this often, you might be better off with some other options.

For example, let’s say you want to take a somewhat conservative route and have an allocation that is 50% in stocks and 50% in bonds, $10,000 in each. Let’s say that over the course of the next year, your stocks rise 25% and that your bonds only rise 5%. You are left with $12,500 (54.3%) in stocks, and $10,500 (45.7%) in bonds. As you can see, if trends like this continued over a period of time, your 50-50 split would be completely out of whack. Re-balancing would mean that you would either transfer some of the stock money to bonds, or just change your contributions so that more money would go into bonds, until everything evened itself out again.

Many people don’t have the time, energy, or the inclination to exercise the do it yourself options. As such there are many “balanced” or “target funds” that automatically re-allocate based on specific criteria. If you have very little time to make your investment selections, these may be the options for you. If you have a LITTLE time, then you can take a little time to choose mutual funds or exchange traded funds (ETF’s) which allow you to diversify with a relatively small investment of time.

Again, these tips will vary from person to person and there is no one size fits all solution. Based on your availability and desire to learn about the markets, your investment selections will vary greatly.

Now What?

So, now that we have covered:

Investing 101: Components to Create an Allocation
Investing 102: Creating Your Allocation
Investing 103: Isolating Your Investing Habits

The next step will be to use everything we have learned about ourselves in order to figure out exactly what we will purchase. In Investing 104, we will be discussing many different types of securities within the different asset classes. By using these descriptions, and what we have discovered here, we can choose which investment vehicles are best for us (Investing 105). The final step is to choose a brokerage, which will be covered in Investing 106.

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