When you invest money, you expect your capital to be returned and to get profit for your trouble. This profit can be from interest, dividends, capital gains, etc. For example, if you buy a rental property, you expect to be able to cover expenses like taxes, and pay off the mortgage with the money you receive from tenants, plus have some left over. (This is called “positive cash flow”).
But the money you invest can also be lost. The stock you buy may drop in value or the company itself may even go out of business. Since investments can’t be predicted with 100% accuracy, financial advisors often suggest diversifying a portfolio. By investing in different asset classes, your losses in one market are independent of what happens in other markets. In the long run, you’ll end up with more winners than losers and you will be able to maximize your returns.
Of course, this simple strategy doesn’t guarantee against loss. Theoretically, (as happened in 2008) an entire national economy or even the global economy could be affected by something, which will result in all investments failing. Fortunately, since this level of catastrophe is rare, diversification generally works remarkably well to minimize your losses and reach your long-term financial goals.
Some investments to consider are stocks, bonds, real estate, foreign currencies, precious metals and fixed investments such as Certificates of Deposit .
Why Invest in Stocks?
Since many people have made a fortune in the stock market, this is usually one of the first markets people think of when they want to invest. The advantages of investing in the stock market is “liquidity” which means that usually you can buy or sell with a simple phone call or mouse click. Unlike real estate the commissions are low and the wait is short. Also one share of Apple stock is exactly like another so you don’t have to worry about getting a rotten one. But you can still buy rotten stock you need to research the company’s future potential to earn, expand, and grow revenues.
One way to avoid having to pick good individual stocks is through ETFs, or mutual funds, since they are already groups of individual stocks they can aid in your quest for diversification. All things considered, if you save regularly, invest sensibly, and plan for the long term, you could make far more money investing in stocks than you could possibly earn from a regular job.
Why Invest in Bonds?
Investing in bonds is ideal for those who don’t want to take the perceived risks of owning stocks. Buying bonds are considered a steady investment that will help you sleep well at nights. While stocks represent ownership of a “share” of a company, bonds are simply a contract where you loan money to the company and they agree to pay you back plus interest. Since stockholders are owners they take the risk that the company might not do well. But bondholders don’t have this risk, the company is obligated to pay them back whether the company does well or not. In the case of bankruptcy, bondholders are ahead of stockholders, so bondholders get paid first and if there is nothing left… stockholders get nothing. Still, it’s rare for people to invest in bonds alone. Instead, they usually buy a mixture of stocks and bonds. While the stocks offer higher rewards, the bonds provide a hedge against taking any equity risk. Bonds are often purchased by people building up their retirement funds because bonds can be used to generate steady income. Bonds can appreciate during times when interest rates are falling and fall when interest rates are rising (unless they are held to maturity when they must return the full face value).
Why Invest in Real Estate?
Although real estate ownership has been used to build wealth for centuries, there are often many myths about real estate investing. For instance, one common myth about rental property is that it’s a form of passive income. This is only partially true. You, as the landlord, must either maintain the property yourself or hire someone to do regular maintenance work for you. Still, when you purchase property, you will have far more leverage over your money compared to many other investment vehicles. Buy buying a “fixer-upper” you can leverage your “sweat equity” to increase the value of your property and jump start the growth of your capital.
Why Invest in Foreign Currency?
Many investors choose the Foreign Exchange Market, usually simply referred to as Forex, for a variety of reasons. Because currencies make up the entire world economy, Forex is a far bigger market compared to all other financial markets. Like the stock market, Forex is a large decentralized, over-the-counter market where you can buy, sell, and exchange currencies at their current prices with the click of a button.
But there are other ways to invest in currencies as well. If you were planning to travel to Vietnam next year and were worried that the Vietnamese Dong was going to appreciate against the US Dollars, you could take advantage of the fact and buy Vietnamese Dong now and possibly reduce the cost of your trip compared to what it would cost you next year. At the very least, you would have locked in your price so you knew exactly how much your Vietnamese currency was going to cost you. This is exactly what big companies do (but on a much larger scale) when they use the Forex market to hedge their overseas investments.
Other ways to invest in currencies is simply to open a bank account in another currency in a bank like EverBank (recently renamed TIAA Bank) which offers the opportunity to open a CD in a variety of currencies or buy a “currency basket”. So if you think Commodity based economies will outperform your home country you could buy the commodity currency basket which includes Australian dollar – 25%, Canadian dollar – 25%, New Zealand dollar – 25%, South African rand – 25%. On the other hand if you think that the BRIC countries will do well you could buy the BRIC basket which includes” Brazilian real – 20%, Russian ruble – 20%, Indian rupee – 20%, Chinese yuan – 20%, South African rand – 20%.
The final way to invest in FOREX is much more speculative and that is to trade on the actual FOREX market. In this case, you need to either be very good at reading charts and predicting directional movements or understand the geopolitical system and be able to gauge which currencies will outperform the others.
Why Invest in Precious Metals?
Throughout history, people have been attracted to gold. It is considered one of the most precious metals. In ancient times it was primarily used as jewelry or for fabricating religious items. Often gold was the only money so there was no such thing as “Investing in Gold” since holding gold coins was simply considered “saving”. Today however, since our money is not based on anything but “the good faith and credit” of the government, investing in gold is not only possible but also advisable. From 70’s gold and silver became a commodity the same as iron, sugar, oil, etc. Rather than a fixed price set by the government, nowadays the value of gold is determined by the market. Thus it fluctuates based on supply and demand. In times of fear demand rises and so does the price. Thus holding a portion (usually no more than 10%) of your portfolio in Gold or Silver can hedge against times when the market is fearful. See Investing in Gold for more information.
In closing, it’s always a good idea to learn as much as you can about each area of investment you’re interested in and to acquire a mix of stocks, bonds, real estate, foreign currencies, precious metals and fixed investments such as Certificates of Deposit. Since you have multiple streams of income, you will be able to enjoy a great rate of return even when some of your investments don’t pan out. Some incomes sources, like real estate, can also provide you with excellent tax advantages.
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