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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 on Friday at noon (ET).

Dear Steve,

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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.

Learn more about investing from John Heinzl The 2010 Investor Education series for beginner investors:

  • Part 1: Want to invest? Learn to save first
  • Part 2: Mutual funds: A good place to start
  • Part 3: Why ETFs are booming
  • Part 4: Sleeping well with GICs
  • Part 5: Why buy and hold is (still) the best approach

The 2010 Investor Education series for advanced investors:

Gail Bebee's weekly mentoring for our investor education contest winner:

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.

Mutual fund company Aim Trimark has posted a decent risk tolerance questionnaire that they use for clients. A simple web search will uncover others. Try out several different risk evaluation quizzes. Coupled with some serious personal reflection, these tools should help you decide where you fit in the risk tolerance spectrum. From a practical viewpoint, your deliberations should result in you slotting yourself into one of the following five general risk categories:

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1. Conservative, low risk, not willing to lose any money

2. Lower risk, willing to own some riskier investments

3. Balanced risk, 50-50 mix of lower risk and higher risk investments

4. Higher risk, less than 50% low risk investments

5. Aggressive risk, mostly higher risk, higher reward investments.

Finally, this week I would like you to think about how much time, on an ongoing basis, you plan to devote to your investments. Be realistic. Life has a way of diverting one's attention from the business of personal finance.

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Getting a good handle on your personal finances, defining your personal financial goals and determining your risk tolerance will form a firm foundation for future investment decisions appropriate to your personal situation. Here is your homework for this week:

1. Complete a household cash flow analysis. How much money do you have available to invest?

2. Refine and write out your personal financial goals, both short term and longer term.

3. Try several risk tolerance quizzes. Reflect on how much risk (of losing your money) you are prepared to accept in the quest for a higher return on your investments. Decide on your risk tolerance level.

4. Decide how much time you are willing to devote to the management of your investments.

Next week, we'll discuss the main classes of investments that are available to direct investors. I think your homework should keep you busy until then. If you do have some spare time, log into your new iTrade account, surf around and familiarize yourself with the information and tools that are available.

Gail Bebee is the author of No Hype - The Straight Goods on Investing Your Money. She can be reached at; her website is

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