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The following is a guest post. Enjoy!
After Learning to Save, One Must Learn to Invest and Where
In these tough economic times, one of the most difficult tasks to achieve is to continue one’s saving regimen when monthly expenses increase, as income remains the same. Financial planners would suggest that you re-examine your spending priorities to ensure that your savings rate continues, “as is”. After accumulating a reasonable emergency fund of from three to six month’s income, the next objective in the account hierarchy is to learn how to invest your excess savings.
Investing advice can be found in many forms, from Internet websites and articles, to investment seminars and advisors. There are many investment vehicles that can be used, but the general premise of all of them is that risk must be managed in a way to yield an appropriate reward for use of your capital. You can manage your own investments or delegate the process to a professional fund manager, experienced in the process. In either case, you must develop an investment plan that describes how you will invest over time and to what degree you will use various investment vehicles to achieve your objectives.
It is amazing how little education we receive in school regarding the art of investing. We all must benefit from long-term investing skills if we are to provide financial security for our later years. Determining where we wish to invest involves studying the risk characteristics of many asset classes and styles, and then deciding what investing style matches with our personality type. If we are naturally cautious, then we may be more inclined to a “buy-and-hold” strategy for investments for long periods. If we prefer a more active way of doing things, then we may tend to favor a trader’s mentality.
From a risk perspective, low risk investment vehicles tend to pay lower returns. The following list of investment vehicles starts with lower risk items and proceeds to those with higher risk profiles:
· Savings Accounts: Funds are generally held by a bank or savings and loan association with insurance from the FDIC to cover your savings from risk of loss up to a specified level. Interest rates are low, but can be higher if you commit your funds for a longer period of time;
· Money Market Funds: No insurance applies to these deposits, but losses have been near non-existent. Returns are low, but withdrawals are permitted without time constraints or penalties;
· Government Bills and Bonds: These securities are sold by government agencies and have their backing. Risks are low and tax advantages may apply. The value of items with maturities greater than one year may change in value as interest rates change in the marketplace;
· Corporate Bonds: These securities are only as good as the companies that issue them. Interest payments will be higher due to the credit risk component. Income payments may be fixed, but the value of these securities will adjust as interest rates change;
· Corporate Stocks: You can buy shares in a company directly or through mutual or exchange-traded funds. Values change as the market assesses the success of each company’s business model. Intrinsic value is the key factor to guide long-term value investing;
· Foreign Currencies: Forex trading is high risk and requires specialized training. Currencies come in pairs, like the “EUR USD” pair, and the market assesses the “relative” value of each country’s economy based on fundamental economic data;
· Real Estate: This medium is also high risk and requires specialized training and local knowledge of the market.
Like any performance-driven skill, the art of investing takes time to learn. Seek out an expert to guide your efforts.
How about you all? What types of financial instruments do you use as investments? Do you find that you generally have a set level of tolerance for risk that determines what vehicles you use?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- First, as mentioned above, it is imperative to follow the account hierarchy of needs to determine where you need to be committing your money. For example, if you don’t have health insurance, you have no business spending money on stock investing.
- For the most part, I agree with the list of investments above, going from low risk to high risk profiles.
- @ Real Estate – One way to minimize the risk of real estate investing while still maintaining diversified exposure to this economy sector is through the use of Real Estate Investment Trusts (REITs – either in the form of an index mutual fund or ETF).
- @ Stock Investing – Many unbiased, academic studies have proven that passive investing strategies through the use of index mutual funds or ETFs beats 70-80% of professional “active” money managers. I would encourage you all to learn more about this form of investing!
***Photo courtesy of http://sharkinvestor.com/pics/timeless-investing.jpg
