The Globe and Mail

Our investing contest is over and we have a winner! We can't identify him, so let's just call him Steve.He's won $10,000 to invest through in an online trading account and four weeks of mentoring from personal finance guru Gail Bebee.

Here is Ms. Bebee's first lesson for Steve, written as a letter, after he told her that he has bought some mutual funds. She answered his questions in an online discussion on Friday at noon (ET).

Dear Steve,

Investing can seem so overwhelming that many give up before they begin and let their financial adviser make all their investing decisions. Steve, you are to be congratulated for moving beyond such stasis and buying some mutual funds. Unfortunately, your funds promptly lost money. Fortunately, you have learned a valuable lesson from this painful experience and realized you need to hone your investment skills.

Improving your investment skills begins with getting a good handle on your personal finances, defining your personal financial goals and understanding your tolerance for risk. Start by completing a personal cash flow analysis. How much money comes into your household every month? Where does this money go? How much are you currently setting aside for saving and investing?

To help you with this task, you can use a commercial program such as Quicken Cash Manager or one of the many free downloadable programs. (See this blog, Daniel’s Corner, for a useful review of several free programs.) But, don’t get too mired in the fate of how every cent you earn is spent. A simple budget spreadsheet such as one I developed for a course I teach, may be all you need to get a reasonable picture of your finances.

Figuring out your personal financial goals can take some soul-searching, but is an essential step in developing an investing strategy which best meets your aspirations. Steve, you’ve already thought about some short term goals -- a second child and a bedroom addition to your house -- and the longer term goal of saving for your daughter’s education. What else is on your radar screen? Spend some time to flesh out and prioritize both your short and long term goals and estimate how much money you’ll need to achieve each one. Map out an approximate timeline for achieving each goal.

We love the rewards of higher risk investing. We hate the horrors of risk gone rogue. Successfully managing our love-hate relationship with risk is the key to a satisfying and productive investing career. It’s critical to understand your own attitude toward risk when you set out to be a direct investor. And that is the third area I’d like you to explore this week.

Many financial firms and web sites offer tools to help you sort out your appetite for investing risk. I like the Risk Comfort Level and Risk Tolerance quizzes offered by the Investor Education Fund, an Ontario non-profit organization which offers unbiased independent financial information, programs and tools for consumers.