Investment Strategies

Investment-Strategiesi_strategiesThe term “investing” has a variety of definitions and people invest for a variety of reasons. In this part, we will review the predominant investment vehicles that can be used in today’s economy and examine the most popular and efficient ways to invest. Too many people bank their financial future on wild strategies.

There is no easy way to get rich quick. If you want to retire in comfort, you’ve got to stick to the basics: Save 10% regularly, diversify broadly.

Favor no-load mutual funds when it comes to stocks in order to participate in the broad market and don’t make quick stock buying decisions. Study those businesses represented by a stock carefully with a healthy buyer-beware mind set. You’d rather wait a long time to find one great stock than leap at sexy sounding opportunities that can falter later.

Better yet, consider investing in a lesser known vehicle-tax lien certificates and deeds (visit the Real Estate section for more information).

Many people invest for more specific goals, such as retirement, a dream home, children or financial security. No matter what the reason, you must first determine what is your primary investment objective. For example, “I want to buy a home in the next year and put together a plan to retire in 20 years.” This statement says this person has short and long-term investment goals. Because of the different time frames (home purchase in one year, retirement in 20 years), an investor probably will need different investment vehicles in order to reach their objectives.

So, let’s first review several traditional investment vehicles in order to accomplish those goals.

Understanding Stocks, Bonds and Money Markets

I. Stocks

Almost any time people talk about investing, they eventually talk about the stock market. So, the first thing you need to learn about is stocks. What are stocks? What do they represent?

Stocks represent a unit of corporate ownership. By owning a stock, you own a share (or piece) of a corporation. A person usually obtains shares of stock in one of two ways, original issue or through the open market.

Original issue stock is the stock issued when the corporation is first formed. As an example, an entrepreneur goes into business but does not have enough money, so he or she decides to incorporate and sell shares to investors. When he files the Articles of Incorporation with his state, he determines how many shares he wishes to authorize and issue. This stock (commonly referred to as “original issue”) either will be sold for capital or retained for ownership.

Once these stocks are issued, they can be bought and sold on organized exchanges or through private offerings. This is considered the open market. The majority of individuals and institutions buy and sell stock on the open markets using the various exchanges such as the New York, American and NASDQ stock exchanges.

II. Bonds

Another major way for corporations to raise capital is through debit securities, which are called bonds. A bond is a certificate that represents money lent to a corporation or government by investors. These certificates state how much and when the corporation has to pay back the original investor.

When you buy a bond, you are lending a corporation money for a set period of time, generally at a fixed interest rate. Most investors buy bonds for income since the majority of bonds pay interest on a monthly, quarterly, semi-annual or annual basis. (Note that shareholders are owners of corporations and bond holders are its creditors).

Corporations are not the only entities (an entity defined as a legal way to hold an asset) that issue bonds. In fact, the largest issuer of bonds is the United States government.

III. Money Market Funds

Money Market mutual funds are similar to bank accounts, but instead of the money being used by the bank, it is invested into short term debt issues (bonds). The type of bonds money markets generally invest in are T-Bills and other short term corporate bonds that will mature in less than 90 days. Since you can pull money out of these accounts almost as easy as bank accounts, they are considered cash. Money you need in less than one year should not be risked by investing in anything but cash. One of the highest yielding “cash” investments are Money Market accounts.


Use the 10% Solution to Go from Paycheck to Prosperity

Many Americans who are still living paycheck-to-paycheck (always finding too much month left over at the end of their money) perhaps believe there is no level of income they cannot out-spend.

Beginning with your next paycheck, take 10% right off the top and pay yourself! Do the same with every paycheck you receive from today forward. Take the first 10% of gross pay, even before you pay your rent, mortgage, car or any other bills.

Your 10% Solution should be invested in a savings account until you have accumulated two to three months of living expenses. Once you have accumulated your cash savings, continue to pay yourself the 10%-but now make the payments (see “attitude money” below) into long-term investment vehicles such as no-load mutual funds.

Qualified plans such as 401(k), 403(b), SEP-IRA, SIMPLE plans and other employer sponsored retirement plans are a great way to apply the 10% Solution. The money is put aside for you before you ever receive it in your paycheck.

An amount as small as $100 a month (10% of annual salary of $12,000) invested for 40 years at an average return rate of 12% would grow to a nest egg of $1,176,477!

Always pay yourself first. The less money you think you have, the more important this strategy becomes. Make the 10% Solution a personal goal. Do it now.


Never Use Life Insurance as an Investment

Buy life insurance as if you were going to die tomorrow and invest as if you are going to live forever. Life insurance and investing, both necessary parts of a good financial plan, have little in common. Life insurance companies got into the investment business for one major reason: There are bigger profits in selling investments connected to insurance than in selling insurance itself.

Your strategy is to buy term insurance and build your investment wealth by choosing the correct investments and strategies yourself.


Diversify: Stay Away from Individual Stocks and Bonds

Buying 100 to 1,000 shares of a stock or pumping $1,000 to $25,000 into one or two bond issues is eight times riskier than investing in stocks and bonds through mutual funds. Buying individual stocks and bonds also means paying commissions. You pay no commission by using no-load mutual funds. Bond investments include individual bonds such as corporate, tax exempt, zero coupon, GNMAs and bond mutual funds including high yield, fixed income and government securities.

If you insist on investing in an individual stock, only do so with money you can lose. Never use your 10% Solution or attitude money in individual stocks.


Do Not Invest in Inflation Hedges Such as Precious Metals

Precious metals (gold and silver) are investments only for the most aggressive investors. Traditionally, gold and silver have been called a hedge against inflation. Inflation hedges are always investment losers. For instance, when adjusted for inflation, the real value of gold has not changed in a hundred years. Your loss in an inflation hedge comes when you sell your investment and pay capital gains tax on your profits.


Do Not Fall for Investment Pitches by Phone

Now you can buy your investments over the phone, but don’t! Dozens of phone “boiler rooms” have been created to sell “ground floor” investments. High-pressure sales pitches are conducted by highly commissioned phone room managers using telephone solicitors. The bait is the belief that you are being let in on some new investment secret or opportunity not generally known to the public.

A common scam is stocks of companies that are sold over the counter (OTC) and under $5. These stocks do not have to go through the same registration process required for stocks sold on the exchanges. The consumer usually cannot get correct information on the company. These schemes make big promises and deliver little-other than an opportunity to lose your money. Incredibly enough, tens of thousands of investors fall for these investment gimmicks every year.

Penny stock brokerage firms control as much as 95% of the market activity of a single stock, allowing them to manipulate the price. Because most penny stocks cannot be found in the newspaper listings, it is very difficult for the investor to determine how much a penny stock is really worth.


Invest in REITs for Income

A REIT (Real Estate Investment Trust) is a corporation, association or trust that acts as an investment agent on behalf of its shareholders. REITs are similar to mutual funds in the way money is pooled and invested; in fact, some mutual funds invest in REITs.

The job of REIT money managers is to find real estate projects in which to invest the pooled money from the investors – with the objective of appreciation, income or both. The recent trend among the nation’s hundreds of REITs is to buy hotels, regional shopping malls and office buildings and then lease them to tenants (providing income to shareholders) or sell them (for gains which will be distributed to shareholders). At the present time, almost five percent of the nation’s commercial real estate is owned by REITs.

Because real estate is not liquid and not easily valued, REITs are an efficient way to invest in real estate: the share prices of REITs are liquid and easy to value, so investors can get their cash any business day.


Do Not Invest in Commodities

Wheat, soybeans, sugar, coffee and livestock are examples of commodities. For hundreds of years these goods have been valuable, but their prices fluctuate often because of supply and demand. As an example, if many people want coffee, but production was reduced because of a big freeze, the price most likely would go up. Even though commodities can be valuable, a person is not going to buy a bushel of soybeans and keep it in their closet until he or she can sell it for a higher price. Because of this, commodity futures were created.

Commodity futures are contracts that refer to the buying or the selling of a contract to deliver a commodity in the future. The buyer of a commodities futures contract agrees to accept a specific commodity that meets a specified quality in a specified month. The seller agrees to deliver the specified commodity during the designated month. Since there are many variables (weather, consumption, etc.) that affect the price of commodities, they are considered a very speculative (risky) investment. Because of this, investors who wish to participate in the commodities market should do so only after their financial goals and obligations have been met.


Do Not Invest in Collectibles

Collectibles include anything that is a non-financial asset that has value or could appreciate in value. Many individuals invest in collectibles before anything else. They also do so without even realizing they are investing. Many individuals start collecting items such as baseball cards, dolls and other collectibles at a young age without realizing the financial value of the asset.

Supply and demand affect the price of collectibles more than anything. For example, assume a person bought one baseball card out of 100 produced of a no-name rookie baseball player. Imagine that the rookie became the greatest player of all time and then suddenly died prematurely. Since the supply is limited and most likely the demand is high, this collectible should appreciate in value.

The important thing to remember when investing in collectibles is that the values are very subjective. Many times, markets are created overnight only to dry up just as quickly. A good example of this was in 1982, when the value of rare coins and stamps declined 40 to 50 percent. The old adage “what goes up must come down” is a good saying to remember when investing in collectibles.


Invest in Mutual Funds

The myriad of investment choices available to the individual investor is immense. Because the average customer has difficulty managing and/or does not have enough money to start their own diversified investment portfolio, mutual funds were created. A mutual fund is a professional money management company that invests an individual’s money for a fee. A mutual fund is a big basket that many investors put their money into, using a professional money manager to invest this money on their behalf, according to the investment objective of that mutual fund. There are thousands of funds with numerous investment objectives. Some invest only in specific industries while others invest only in socially conscious companies. Socially conscious funds are companies that invest for social good. They generally avoid companies involved in war materials, liquor, tobacco, gambling, etc. There are even mutual funds that invest only in other mutual funds.

In addition to a variety of choices, mutual funds also allow the individual investor to construct a portfolio that fits their particular needs, even allowing individuals to start investing with as little as $50. By using mutual funds, the average investor can obtain diversification, professional money management, liquidity and multiple investment options.


Invest Only in “Open-End” Mutual Funds

An open-end mutual fund is an investment company from which investors may buy shares and to which they may resell them to the investment company. This means if an investor buys 100 shares of XYZ mutual fund and then wants to sell them, the open-end mutual fund would redeem those shares that day for the investor. On the other hand, a closed-end mutual fund issues a limited number of shares that are bought and sold on the secondary market. This means if an investor in a closed-end mutual fund wants to sell, the fund must find a buyer or the investor cannot redeem the shares.


Invest Only in “No-Load” Mutual Funds

A load is nothing more than a commission or charge for the salesperson or company who sold the fund to you. This fee has nothing to do with how the fund will perform and gives you no more advantage than no-load funds.

Since the average investor can choose among so many investment options the choice of no-load open-end mutual funds offers a convenient and practical way for the novice investor to build a substantial portfolio.


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