The art of investing has always drawn a large crowd of spectators because it glistens with the glamour of famous families – Vanderbuilts, Astors, Rockefellers who made instant fortunes while playing the game. What makes it even more fascinating is that these families have not spent a penny of their fortunes because good investment techniques have allowed them to live off of the profits.
Some wary of investing their money in anything but a savings account, claiming that the market is not something the average person can play and become wealthy from. This may have been true 30 years ago, during a period of general corruption where money was made during afternoon golf games, resulting in a general dip in the number of individuals invested in the market. However, after the examples of Enron, Worldcom, and Martha Stewart, insider trading has been virtually eliminated, once again leveling the playing field and witnessing a surge in investors.
The main points you need to remember about investing break themselves down easily within a simple tree. The three main branches are:
1. Asset fields
2. Tax deferred accounts
3. Liquid account
The asset field branch is the only one in which you can potentially lose money. It includes all of the volatile investments that fluctuate with economic cycles, market trends, and even consumers’ whims. To best avoid a collapsing portfolio, the investor must split initial capital among four sections of this branch:
1. Real Estate
The general trend is that as one of the four sections loses value, another will gain value. So, it can be concluded that splitting your principle investment into quarters will protect your portfolio in the long term.
Real estate is probably the single investment that most people get involved in. Owning a house, condo, apartment, or even just an empty plot of land is a common way to buy into this sector. I find, though, that it is a little unrealistic to expect a beginning investor to go out today and buy a house while, at the same time, putting money in other sectors. Therefore, the alternative to buying property that I offer is investing in real estate agencies or developers; that way, as the real estate market goes up, you can reap profit from it while avoiding holding a mortgage at a time that is not suitable to you.
Currently, commodities is by far the strongest sector in the asset field. You need look no further than the price of oil for proof that commodities are highly valued. One commodity that is doing especially well, but whose publicity is being stolen by run-away gas prices, is the copper industry. Copper is necessary and crucial for developing countries, such as China, to get their industries underway. Therefore, companies such as Freeport McMoRan (FCX) has seen a 37% increase in stock price in the last quarter. One lesson to be taken from this point is that awareness of current events and the logical progression of what people need is important to consider as you dabble in the market.
Bonds are rather straightforward. By buying a bond you are giving a loan to the seller, and in return you are getting a percentage of interest paid back to you. Moody services rates bonds according to the alphabet, with an AAA rating being the best. The better the rating, the safer the bond is considered, meaning that it is unlikely the company will default on your investment. Not the most lucrative, but definitely the safest, government bonds are included in this category, and wary investors will find solace in the fact that the U.S. government has yet to default on a bond it has issued.
The stock market is the best known of the asset fields, and it is split into two domestic and foreign stocks. Right now, the two best currencies to invest in are the dollar and the euro. So, if you own only two stocks in your portfolio one should be domestic, such as General Motors (GM), and the other a European stock, such as Alcatel-Lucent (ALU). When investing in stocks, diversification is the word to remember. Diversify by stock price, country, region, and sector.
The second branch of the investment tree is appealing because it is tax deferred. I believe everyone should have two accounts in this branch:
Many employers set up IRAs for their employees. Its an account that provides a great backup for once you’re retired, especially given that many jobs no longer offer pensions and Social Security is meant only as a supplemental income. One detail about IRAs that most people don’t realize is that you can withdraw once, but only once, from your account before your retirement without penalty when you buy your first house. Therefore, workers need not have to tear themselves between setting aside money for a house or thinking ahead to retirement; with an IRA, they could easily do both at the same time.
An annuity is a valuable account to have, especially if you have or are thinking of having children. The beauty of an annuity is that it is tax free, and as such, when your children are applying for colleges, the money you have in annuities does not show up when they apply for financial aid. And, if you’re 55, you can freely withdraw from an annuity without paying any penalties.
The last branch is the least volatile, not the fastest growing, but definitely the most popular. Liquid accounts include:
3. Certificate of deposit
By no means would I consider a checking account an investment the highest rate on a checking account I’ve seen in .25%, and most pay no interest at all.
A savings account is once again becoming a safe account that is good for beginning investors, who must first be savers. Many online banks are giving 5% interest on their savings, which is better than some CDs.
Certificates of Deposit are becoming slightly more lucrative as interest rates edge up. Citibank offers a seven-month CD for nearly 6%. This option is of course more lucrative than a savings, but you are sacrificing some liquidity in the process. So, before you commit to a CD, be sure that you have a sufficient safety net to fall back on.
With this simple outline you can quickly be on your way to building a successful portfolio. In the beginning, remember to keep a few key things in mind:
You must save before you invest. The last thing you want is to start your portfolio in the red. Be aware of your surroundings because the whims of the millions of other investors will help decide if you make a profit or lose money, keep an eye on current events and public sentiment. Once you’ve gotten the rhythm of the market down, follow your gut.