How to invest wisely: Investing pros and cons


Smart investors have made a fortune by understanding the market, and the power of the buck.

An investment plan is as individual as the investor. Young people buying a starter home have different needs than a business partner buying into an income property. For some, long-term security options are attractive, while others want the highest and quickest return on investment.

Popular investment options include stocks, bonds, annuities and real estate.


The stock market is volatile. Warren Buffett, the world’s richest man in 2008, amassed his wealth by playing the stock market. Others have lost millions. Successful investors believe in research, patience and a good knowledge of the market.

There are two types of stocks: common and preferred. Common stocks allow the stockholder to vote and have a say in the company. The return on common stocks tends to fluctuate. Preferred stocks have a fixed return, but the buyer has no voting rights.

Stocks can include penny stocks, blue chip, and value stocks. Penny stocks are just what their name implies. Blue chip stocks are those from reputable companies, with a history of good performance. Value stocks, a favorite of Mr. Buffett, are those offered by a company at a discount, usually because of management or economic changes.

Return on Investment
Research is a must. With a solid knowledge of the market, the smart investor can make decisions based on fact instead of impulse or emotion. Since stocks provide an unlimited profit potential, return on investment can be substantial.

Risks and Disadvantages
On the other hand, the primary risk is abject poverty. Stock prices can be deceptive, and the wise investor must have a strong understanding of price-to-earnings ratio and intrinsic value of stocks.

Investors need thoroughly research a company before buying stock. An investor should know the key management personnel and company structure, as well as past market performance and overall growth potential of the company. The investor must know when to hold, when to sell, and when to sell short.

Selling stocks within a year will incur a short term capital gains tax of 30%. After a year, a ten percent tax applies.

Stocks can be unstable, and provide no tax advantages. The unwitting investor is subject to a number of scams, including pump-and-dump schemes, wherein a seller inflates worthless stock through hype, and dumps his share at high prices. The stock then becomes worthless.


Bonds are a reliable security, and best purchased in combination with other investments. The bond is a loan to a corporation, government, or agency, for a guaranteed return of interest or percentage of the loan. A bond matures after a set period of time, usually several years.

An investor can purchase a wide variety of bonds. Baccalaureate bonds help finance tuition for a child or grandchild. Municipal bonds can help build a highway. An investor can personally purchase bonds, or acquire them through mutual funds or exchange traded funds.

Mutual funds and ETFs differ slightly, but both are a diversified group of stocks, bonds and other investments, handled by a professional company. The company does the legwork, and the investor pays a fee.

Return on Investment
Bonds offer a predictable stream of income, and repayment of the initial investment. The return on investment depends on the interest rate, and the terms attached to the bond.

Risks and Disadvantages
In general, bonds are a low-risk, long-term investment. Because they’re usually secure, the payoff is minimal.

One drawback to bonds is that most have a call option, and the issuer can call back the bond after five to ten years. The investor gets paid, but possibly less than the anticipated return. Issuers often use this option if they feel they can obtain better interest rates elsewhere.

Interest rates can eat into the value of bonds if the holder has to sell early. If interest rates go up, the value of the bond goes down.

Bonds usually have fees attached, which can have a negative impact on return. Also, in the event of company bankruptcy, bondholders have little or no claim to the assets of the company. For this reason, some investors buy into leveraged loans instead of bonds.

Leveraged loans may be purchased through mutual funds, but aren’t always a guarantee of security, if the company can’t meet its debt obligations.


Annuities are investments offered by insurance companies, and can pay off immediately or further down the road. Annuities create a fixed or variable stream of income, and are tax-deferred, meaning that the investor pays no taxes on the money in the annuity.

Annuities may be qualified, or nonqualified. Qualified annuities are available through a third party, such as a workplace. One example is a pension. Nonqualified annuities are independent contracts, and the investor acts on his/her own behalf.

Annuities offer a variety of payment options. Investors can receive a fixed payment, or earn more (or less) as the market goes through its usual fluctuations. One may receive money immediately, or purchase a deferred annuity, which usually pays off at retirement.

Return on Investment
Both qualified and nonqualified annuities can offer savings and security to the wise investor. The return on investment is directly proportionate to the money invested.

With a qualified annuity, investors often pay through deductions at work. A nonqualified annuity offers more control to the investor. With a nonqualified annuity, there are no federal limits tothe amount one can invest per year, and the investor is exempt from making minimum required withdrawals after a certain age.

Risks and Disadvantages
Overall, the risks of purchasing annuities are low.

If the issuing company goes bankrupt or otherwise can’t pay, your money is forfeit. Be sure to use a reputable company with a proven track record.

Early withdrawals, before the investor reaches the age of 59 , may incur a tax penalty of ten percent.

Qualified variable annuities require the investor to make minimum withdrawals after age 70 . Nonqualified variable annuities do not.


The current economic downturn has knocked down housing prices, and real estate is a buyer’s market. The market fluctuates in cycles, and wise investors realize that housing prices will rise again. More people are now taking advantage of market trends to invest in homes or commercial properties.

Real estate practically runs on leverage, and a small amount of investment capital can finance a greater reward in the long or short term. Real estate, unlike cars, clothes and consumer goods, won’t lose value as soon as it’s purchased. Home owners are more eager to sell in a period of economic downturn, and good deals abound on the market.

Return on investment
Even in unfriendly economic conditions, it’s rare that a property depreciates in value. For long-term investors, part of the payoff is the security and satisfaction of home ownership, and a safe place to raise a family.

For short-term investors who want to renovate and flip a property, the investment can pay off in quick financial profit. For persons seeking a regular income, a rental property with good tenants can bring in some extra money.

Leverage is a strong advantage in real estate investment. A property owner can borrow a substantial amount of money against a small amount of investment capital. There’s less inherent risk in using leverage for real estate than for other products such as a car, since property values tend to remain stable in the long run.

A homeowner can benefit from a wealth of tax deductions, and low mortgage rates are available for those who shop around.

Risks and Disadvantages
A buyer who fails to do research can end up with a money pit. Renovation costs, building codes and fees, zoning restrictions, property taxes and bad tenants can add up to financial disaster. The onus is on the homeowner to research and properly inspect the property.

Potential landlords are not always suited to the job. Any property needs work and upkeep, and not everyone has the time or ability. Problem tenants or neglected premises can cause financial troubles for an unprepared buyer.

Real estate is currently a buyer’s market, so home flippers have a lot of competition from other sellers, and may have to hold a property longer than anticipated.


Any investment involves risk. Usually, the amount of return is proportionate to the amount of risk involved in the purchase. Many investors choose to minimize risk with life insurance, or by purchasing a trust fund.

All investments have their pros and cons. Bonds have little risk, but only modest returns. The stock market is a high-risk endeavor, but could pay off for experienced investors who have a safety net and a good exit strategy.

Annuities are flexible and offer a variety of options for investors wanting to build a regular stream of income. Real estate is a stronger investment in a battered economy than a thriving one, but in either case, property is a good all-round source of income and security.

Many investors prefer property ownership as a way to increase wealth, and as a secure and safe place to raise a family, or retire with peace of mind.