Investing Guide For Beginners.
Why invest your money at all? Why not just stuff your cash under your mattress and spend it when you need to? This is probably the safest way to handle your money but unfortunately your ‘nest egg’ will actually lose value over time because of inflation. You do need to invest just to maintain the value of your money. Putting it into a bank deposit account to earn a little interest is the least you should do. The emphasis in this kind of minimum risk investment plan is on ‘a little’. Basic saving interest rates rarely pays more than inflation. Also banks are perhaps no longer seen as the rock solid institutions that they once were. Lehman Brothers, Bear Stearns and even the national bank of Iceland have seen to this.
Investment is different than saving. Investment is about growing your surplus money. Surplus money is that money that is left over at the end of the month, when all your financial commitments have been met. Investing is like filling the bath. The first thing you need to do is put the plug in. In money terms this means paying up any debts that you may have before you think about investing for growth. You will save far more money by closing out any credit card balances, than you can possibly earn from savings interest.
If you are a homeowner with a mortgage then you are already investing for growth and there is a lot more value to be had in paying off your outstanding mortgage. Any surplus money that you have each month reduces the amount of mortgage interest that you will pay over your mortgage term and it also increase the equity that you have in your home.
There is a second and equally important reason to invest any surplus money you may have and that is to build a pot of money for your retirement when you will no longer earn a regular wage.
A third reason to invest is it to give yourself choices in life, for instance how much work to do or even if to work at all.
Bonds or Certificates of Deposit (CDs) are a very safe virtually risk-free way to invest. When you put money into state government bonds for instance you are lending the government money and you will get that money repaid after the term of the bond and a little interest on top that will probably beat inflation.
Bonds and CDs are the lowest level in a hierarchy of risk. All other higher levels of investment have a higher chance of the organization that you lend to going bankrupt and taking your money away with it. As a general rule however, the greater the risk of the payer defaulting the greater the return on your investment. For the first time investor the risk versus reward decision is the hardest to take. Many people, new to investment are unaware of the less traditional methods of making your money earn more money, such as self-directed IRA’s (Individual Retirement Account). You could for example use your self-directed IRA to buy real estate, undeveloped land, shares in office complexes, vacation rental property or condos and apartment buildings. Real estate is a more secure investment because you have shares in real physical assets. Even if you don’t want to get involved in property management you can still invest in real estate with a share in Real Estate Investment Trusts.
Investing in stocks has always been an effective way of growing money values, often many times greater than inflation. But there are risks involved in the stock market to go along with the higher returns. As with real estate you do not have to become a stockbroker to buy into stocks because you can purchase shares in ‘mutual funds’. Your money goes into a big pot and the fund managers actively manage a portfolio of stocks on behalf of you and all the other investors in the fund.
‘Investment securities’ is a general name for any investment where your money is lent to another party with the intention of earning a regular return. More often than not these are the province of individuals of ‘high net worth’. You would need a minimum of $1 million or be earning $200,000 each year for the last two years and to join this investment club. An example of an investment security would be a private offering of a share in a real estate deal to build and rent an apartment block. Here you would be one of small group of investors aiming to make double-digit returns or more, over say a five-year period.
The two golden rules when considering investing for the first time are:
- Don’t put all of you surplus money into a single investment vehicle. Take some stocks here, a little real estate there and over here some rock solid government bonds or ‘Treasury Bills. It is called diversification to spread the risk.
- Never invest more than you can afford to lose.