Financial Literacy Month: Investing

by Matt B

Investing is a tough subject for me to tackle. Especially in one post.

Stocks, Bonds, Mutual funds. These are the words that come to mind when the word “investing” is uttered. Unfortunately, that is not the first thing that should pop into your head. Investing, literally is putting something into something else with a hope of a future return. For example, we invest in our children with our time, money, knowledge and a wealth of other attributes in hopes that they will becom well adjusted, decent adults. In order to become intelligent with money, investment is necessary. Whether you are investing your time- to manage money or your energy and ideas- to earn money, you are investing. Not one financially successful person in the world has done it without some sort of investment.

Investing our money is a touchy subject these days. In the wake of the recent recession and financial “collapse”, many people who have invested a lot of money have also lost much of that money. Almost nobody has escaped unscathed, and the result has been people becoming much more aware of their finances and assuming more conservative approaches toward money as a whole.

*The rankings that I am assigning these types of investments are not set in stone, just a historical “rule of thumb”, if you will.

“Safe” Investments:

Government Bonds
Maybe your Grandmother bought you some Savings Bonds when you were young. Coming in two series, E/EE, or I bonds, these are basically a small loan to your Government. Series E/EE bonds are bought for half of face value and mature in 30 years. These bonds are redeemable before maturity, but do not usually reach face value until the 15-20 year mark. Series I bonds are sold at face value and have a fixed minimum return rate accompanied with a variable return rate that adjusts with inflation twice per year.

T-Bills, Treasury Notes, Treasury Inflation-Protected Securities (TIPS) and Treasury Bonds-
Treasury Bills, (T-Bills) are short term government securities. With a maturity range from a few days to a year, bills are bought at a discount and paid in full at maturity. Treasury Notes are similar to T-Bills, but maturities come in 2, 3, 5, 7, and 10 years, yielding interest every six months. TIPS are marketable securities that are adjusted with the Consumer Price Index. Interest is paid every six months and maturities come in 5, 10, and 20 years. Treasury Bonds mature in 30 years and pay a fixed interest rate every six months. All of the above investments can be further researched and purchased from Treasury Direct.

I have explained CD’s before. CD’s come in fixed terms for fixed returns. They are federally insured, leaving you piece of mind when it comes to return on investment, but yield on CD’s will not make you rich quickly.

Savings/Money Market-
Another of the safest investments are Savings or Money Market accounts. Both of these, like CD’s are federally insured (unless your money market account is with a brokerage firm that is not FDIC insured) but investment return is usually lower than with CD’s. Most “plain” savings accounts have a percentage yield of less than 1%, which is typically less than the rate of inflation. This investment, while safe, will likely not make much money, with inflation figured, it may even lose some.

Precious Metals/Collectibles-
Most metals will never lose their value altogether, making them among the safest investments. Market and currency fluctuations have their effect on metals, but they generally gain value over time. Note the recent prices of Gold, as people have seen it as a “safe” investment in tumultuous markets. Collectibles also qualify as a safe investment, but do risk loss of value due to re-creation or re-issuance of said items. A general knowledge of collectibles is recommended for a decent return, making it generally safe, but not easy.

“Moderate Risk” Investments:

Real Estate-
If done properly, purchasing real estate can become your primary income source. It can also break the bank. While not extremely risky, real estate investment deals must be carefully monitored to get the best returns. Maintenance and other expenses can deter investors from real estate. Another option is to invest in a Real Estate Investment Trust, a company that owns, and in some cases operates income-producing real estate.

Mutual Funds-
There are hundreds of thousands of mutual funds to choose from, offered by nearly any broker. Mutual funds are a collection of stocks, bonds, and cash instruments. Fund managers trade within the fund itself, making decisions for the holders. While most funds are set up to get modest and dependable gains, making them a pretty safe investment, there are hundreds of choices of funds offering multiple risk levels.

Large and Small Cap Stocks-
Over the past year, stocks have taken a pounding. That is no secret, but for decent returns without too much risk, there are still hundreds of thousands of companies worth purchasing a stake in. Selectivity and education are the keys to sound and profitable stock choices, but risk is always there. As the old adage goes, “there’s no such thing as a sure thing”. Most stock investors have experienced this first hand at some time during their market activities.

Corporate Bonds-
Corporate bonds are an attractive investment to perspective buyers. These bonds can pay off big, but unpaid bonds or company bankruptcy can ruin investors. Depending on the size and income of the corporation, bonds offer varying returns. Like stock selection, education is key when selecting bonds. You can try to go for the big return, but keep in mind that the reason the company is paying higher interest is because they are a higher risk borrower. (Just like people with poorer credit scores). Overall market activity also dictates how these bonds perform.

Retirement Accounts-
Most retirement accounts, such as IRA’s and 401k’s are structured to allow investment flexibility. This allows younger investors to be more aggressive (if they so choose) and lessen the risk closer to retirement age. For most retirement accounts that are self-managed, risk is relative to the investor’s preferences. Of all of the “moderate risk” investments, retirement accounts are by far the most user friendly by allowing the adjustment of risk to be conducted when the account holder sees fit.

*There are many other “moderate risk” investment choices, such as ETF’s and Index Funds that involve the stock market. If you are unfamiliar with these vehicles, research first and act later.

“High Risk” Investments

Hedge Funds-
As of late, we have been seeing the demise of Hedge Funds, so this high risk investment may not be around in it’s traditional form for much longer. Hedge Funds are not
unlike Mutual Funds in structure. Their biggest differences are lack of regulation in the Hedge Fund, and fund managers who have different objectives for their customers. Hedge fund managers tend to make knee-jerk decisions that sometimes earn quick and lucrative profits, and sometimes lose tremendous value. Late last year, many Hedge Funds became nearly worthless due to overzealous managers holding volatile stocks and commodities.

Penny Stocks-
Sure, penny stocks can get some of the best gains in the entire market. They can also drop your entire investment faster than you can make a cup of coffee. With so many traders involved with markets every day, penny stocks can often see huge swings up or down in the same day of trading. I always look at penny stocks like lottery tickets. Sure, they are cheap and you could “win it big”, but spend enough money on them over time, and it just becomes a disappointment.

Forex Trading-
Like penny stocks, trading foreign currencies is a popular trend as of late. More unreliable currencies can (like penny stocks) make huge swings during the course of a business day, making Forex attractive to those who want to gobble up the big returns. The problem with currency trading is that you never know what is around the corner. Who knows? There could be a crazy swine flu right around the corner that is going to make one currency nearly worthless. My advice on currency trading: Leave it to the experts. The novice investor has no business trading on speculation (most likely read on the internet).

***When it comes to investing your money, there are many questions you should ask yourself. Most importantly, how much can I lose without being broken? Assess your risk and invest accordingly. Smart investing is one of the keys to a prosperous life.***

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{ 1 comment }

Samson Smith September 16, 2009 at 2:55 am

Great post, i think people who want detailed information on different types of investing option will get good knowledge from this post and according to me all safe investment are the perfect one.

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