I’m often asked questions such as, “what’s a good stock to pick” or “how is the stock market doing.” These questions are generally followed up with statements such as, “I don’t invest because I know very little about stocks” or “I don’t invest because I’m afraid I will lose all of my hard earned money.” These are legitimate concerns. One should know however that America has the largest, richest economy in the world. Although it’s true that any investment you make is subject to risk that involves a possible loss of the money invested, a balanced mix of investment products will help to offset potential losses.
When you look at investing from a product perspective such as stocks, bonds, mutual funds, options, real estate, commodities etc, it can be overwhelming and confusing. Investing is not as difficult as it seems. There are essentially two basic choices to investing. Investing where you become a lender to someone, namely savings accounts, certificates of deposits, bonds, cash value life insurance and fixed annuities.
Investing where you become an owner of something, namely stocks, real estate, precious metals, farmland, oil and gas syndication, etc. Your concentration on investing should be on your goals and objectives—why am I investing? The investment product you select will be used as a means to an end. This will make your investment experience easier to understand and more fulfilling. If you come across anyone touting a particular investment as a good investment without understanding your goals and objectives, I advise you to run for the hills, for that’s probably where you’ll find your money.
Investing is the process of sacrificing something today so that you can have more of something at a later time. For example, you deposit $200 per paycheck into a savings account to purchase a couch that cost $2,000. In this example you sacrificed money that could have been used for something else in your quest to save enough money to make a future purchase — couch. The savings account in this example was used as a tool to reach your goal. The above illustration as simple and as common as it may appear is the foundation from which all investment decisions should be made. Too often, we tend to make investment decisions because that’s what so and so told us to do or because we heard that someone else made a lot of money in the stock market. Conversely, many of us tend not to make investment decisions because so and so told us not to or because we heard that someone else lost their shirt in the stock market.
Our decision to invest money in a particular vehicle should stem from our goals and objectives. We should ask ourselves question such as: What is my objective? How much money do I need to accumulate to meet my objective? What is the time frame? How much can I afford to invest per week/month/year? How much of a risk am I willing to take? How much do I anticipate earning on my investment? Answering these questions will not only help you form a plan. It will ultimately help you select the investment products (tools) you will use to accomplish your goal. Below are some of the primary reasons people save and/or invest money:
Emergency—raining days, unexpected events
Contingency—future expenses that are due quarterly or annually such as insurance or taxes
Large purchases—any item costing over $500
Vacation—paid for vacations are the best way to travel/ otherwise the vacation follows you home in the name of bills
Car—enough to cover the cost for a down payment and closing cost—oftentimes to purchase the car in cash
Home—enough to cover the cost for a down payment and closing cost—sometimes to purchase the house in cash
Children’s college education—it will be great to start life without student loans
Capital Sum to start a business—not everyone borrows to start a business
Retirement—these years are supposed to be golden
Wealth—some people plan to become millionaires
The greater the potential earnings being offered, the greater the potential risk. Investing by lending is a more safe and conservative style of investing. Investing by owning is a more aggressive approach. The risk is greater when you invest by owning—so are the potential earnings. Investing in its truest and safest definition is a plan wherein you’re making a long-term commitment (5-years or more). You have to be both willing and in a position to forgo using the invested money for a minimum of 5-years. This will allow your money to grow—more importantly withstand the ups and downs of the stock market. You should utilize stock mutual funds and other investment by owning types of investments only when you are investing long-term. Whenever you are making short-term investments (under 5-years), consider investment by lending types of investments, such as money market accounts, savings accounts and bonds. Money market and saving accounts are also known as cash-equivalent accounts because you can easily convert money into cash.
As you begin to define your goals and objectives, you will begin to understand how to utilize the various investment products as a means to best benefit you. We will break down the various investment products in future articles. In the meantime begin breaking down and prioritizing your goals and objectives for investing is a plan not a product.
(Damon is the owner of ACE Financial. He can be reached at 412-856-1183 or visit his website at www.allcreditexperts.com. ACE is the Place for Mortgages and Financial Planning.)