Investing Money Wisely

Before investing, it is important to understand the relationship between Risk and Rate of Return. 

Risky Investments:

 1.   Commodities Speculation.

Commodities trading is the buying and selling of materials for future delivery.

Illustration: let's assume you purchase of futures contract to deliver soybeans in 90 days at five dollars per bushel, and they are presently selling for 4 dollars a bushel.  A smart investor would buy a contract for 1000 bushels to be delivered in 90 days at five, and immediately purchase 1000 bushels a market price for 4 dollars.  You just made $1000 in all you have to do is store the beans for 90 days; it's a good deal.  But what if in the three-month soybeans are down to three dollars a bushel?  In that case you would have lost $1000.  The losses can be greatly magnified to credit.  Suppose you bought a contract on margin (credit) to see and put down 50 percent.  If soybeans go to five dollars a bushel, and you stand make more than three her percent in 90 days.  If they go down to three dollars, you can lose the same percentage!  The risks high, but so are the potential profits.  If they want, who would be foolish enough to risks money?

2.   Partnerships.

The most common financial partnerships are "limited partnerships," meaning that the contractual arrangement specifies a "General" or managing partner, and one or more non-managing or limited partners.  The intent of the limited partnership is to limit the liability of non-managing partners to their financial investments only.  Thus they would be sheltered from lawsuits, contract defaults, and future losses.

3.   Tax shelters.

Tax shelters are used primarily to defer income taxes rather than for any economic value they might have.  It does not mean that they do not have economic value.  Any investment has no economic value is prohibited, according to tax law.  But the intent is primarily to deferment of current tax liability, but unclassified data investment has a tax shelters.

4.  Precious metals.
There are two reasons why people invest in precious metals such as gold and silver:

• The first, as with any other commodity, is to speculate on their rise and fall.
• The second is as a hedge against the future collapse of the economy and/or the currency system.

 One negative aspect of speculating in precious metals is the cost of buying and selling them.  Unlike stocks and bonds, which have a well organized in highly competitive market, precious metals have no such market.  Investors can buy contract for future delivery of precious metals in the commodities exchange, just as for virtually any commodity, the buying the actual metal is limited to a relatively few traitors around the country.  These traitors or dealers mark of the metals, usually from five to as much as 12 percent, when they sell them.  Then when they repurchase the metals they make an additional premium by the way of the discount from the quoted retail price.  Essentially investors buy at retail and reselling pose sell.  It takes a significant rise in price to make up the fees. 

5.   Gemstones. 
Most novice gem speculators usually buy high and sell low.  I have not met a single novice (nonprofessional) investor who has made money on gems, except by reselling to another friend who didn't know better.

6.   Coins.
Collectible coins, stamps, and other antique items can be good investments for knowledgeable buyers who take the time and effort to become proficient in their trade.  As with other collectibles, the novice investor in coins will soon discover that he must purchase his "investment" at retail value and resell at wholesale value.

7.   Stocks.
The knowledgeable, professional investor can and does make money regularly on common stocks.  Also, anyone can learn how to evaluate stocks and reduce the risks involved.  But for the average investor, today's market is not like that of our Father's Day.  Determining which stocks will do well and which will not is a highly technical field that very few investors are equipped to handle. Those who lose money in the stock market are the novice investors who buy stocks based on their "gut" feelings.

The Best Investments:

1.   A home.
Without question the best overall investment for the majority of Americans has been their home.  Residential housing has kept track with inflation and appreciated approximately four percent a year besides.  That doesn't make it the best growth investment, but it does make it the best performer for the average individual. 

A simple investment strategy to follow is to make the ownership of your home your first investment priority.  Then use the monthly mortgage payments you were making, start your savings for education or retirement.  If you can retire your home mortgage before your kids go to college, they can graduate debt free (and you too).

2.   Rental Properties.
The majority of Americans know how to evaluate rental properties, particularly residential housing.  Most of us have been renters ourselves at one time or another, and have bought and sold homes.  Most homeowners have the ability to evaluate rental real estate; at least when compared to buying soybeans, stocks, or coins.  Therefore, rental properties are logical source of investments -- but not for everyone. 

Rental tips:

• Set rent levels at less than the going market rates in your area.
• Qualify potential renters (e.g. credit check, previous rentals, personal references.)
• Use all rental income to cover mortgage payments and other out-of-pocket costs including that of maintaining the property. 
• Establish a goal to pay off the property within fifteen years. 

  You'll receive very little personal income during this time.  In time, however, you will own several rental houses get free and have a sizable, and very stable, income.

3.  Mutual funds.
The whole concept of mutual funds is designed to attract the average investor.  The pooling of a large number of small investors moneys to buy a broad diversity of stocks (and other securities) is a simple way of spreading the risks.

Mutual funds have several advantages:

• most allow small incremental investments,
• they provide professional investment management, and
• allow great flexibility in the shifting of funds between a variety of investment assets.

Loaded fund = a sales commission and administrative fees are taken out of the purchase price of the fund upfront.

No-load fund = no commissions or fees are deducted upfront.  Fees and administrative fees are collected over the life of the investment.

I have personally found the wall managed no-load fund will be a well-managed loaded fund; therefore that is what I look for.  But a well-managed loaded fund is better to buy a poorly managed no-load fund.  So choose your fund carefully.

4.  Insurance Products.
There are two basic types of insurance plans used most often as an investment vehicle:

• Annuities
• Whole life insurance. 

The difficulties are to determine which best suit your investment needs, and then to decide which company offers the highest return with the lowest risk.

5.   Company retirement plans.

The jargon used to identify these plans may be confusing, with titles like 401(k), 403 B., TSA, HR-10, and alike.  But, in truth, the titles simply reference to tax codes to authorize the plans. 

The advantage of company sponsored retirement plans is that usually the funds invested are tax-deferred (delayed into withdrawing).  Additionally, many companies offer matching funds based on a percentage of what you elect investor solves.  Some companies even go so far as to provide 100 percent of the retirement funds.

Some potential problems with company retirement accounts:

• The plan administrator may invest poorly, thus placing your funds in risk.
• The Company may reserve the right to borrow from the employees retirement account for operating capital.
• The Company may reserve the right to borrow from the retirement account and substitute an insurance annuity for the cash.

6.  Government-backed Securities.
For investors older than 50 years of age, government-backed securities may be the best investments on the list. This does not imply that securities such as CDs, T-bills, bonds, and like are the best performers.  As mentioned earlier, they are usually selected for their lack of risk, not the return.

Investment Strategies

1.   Diversification.

Diversification is essential regardless of your age, income level, time frame, or personality.  Obviously those who small amounts of money to invest can not diversify as well as those with greater resources.  But as your savings grow, your diversity should grow to.  It is important to diversify not only in different investments, but also in differing areas of the economy.

2.  Ethical investing.
The question every Christian must ask, "is what I am about to do going to be pleasing to the Lord?"  If not, stay away from it -- no matter what the potential profit.  There are investments that can yield very high rates of return with little or no risk.  The difficulty is they prey off the weaknesses of others. 

What about owning a small percentage of stock in the Company that does something unethical?  Boycotting the Company's products has a much greater effect on their policies the boycotting their stock.

3.   Good Counsel.
Good counsel is the central to good planning.