INVESTING IDEAS FOR THE LITTLE GUYS
Many small investors are drawn into speculative or high risk investments because they have little money and seek high returns. These investments should be approached with caution, and careful research should be done to ensure they are appropriate for your situation. Always remember the warning: never invest more than you can afford to lose. This warning holds even truer with high risk investments.
For investors with little cash, up to four thousand dollars, there are many safe investment vehicles that provide fair returns and also minimize risk. Diversification is the key to risk reduction. By diversifying, you limit your potential that one sector or industry will collapse and take your entire portfolio with it. The following three investments are some of the best places to put your money.
Fund your company’s 401(k) plan up to the maximum amount. If your company offers a contribution match make sure the contribution is at least enough to get the maximum match. This is free money and should always be taken advantage of. The second advantage a 401(k) provides is it lowers your taxable income and may reduce your tax liability. Contributions to a 401(k) plan are taken out of your paycheck before taxes are calculated. By taking money off the top of your paycheck, your taxable income is lower. Finally, the money in a 401(k) plan grows tax free until you begin to withdraw it at age 59 or retirement.
Individual Retirement Accounts or IRAs are next best to a company sponsored 401(k) plan. There is a distinction to be made between a traditional IRA and a Roth IRA. A traditional IRA works much like a 401(k) account in that your money grows tax free until retirement. At retirement, taxes must be paid on withdraws. These accounts are based on the assumption you will be in a lower tax bracket at retirement and will not have as great a tax liability as you might in your younger, working years. Also, contributions are tax deductible for a traditional IRA account. A Roth IRA is similar except that your contributions are not tax deductible. Your money will still grow tax free but you will not be able to take a tax deduction for your contributions. The best part of the Roth is when you begin withdrawing at retirement, you do not have to pay taxes on withdraws.
High quality, no-load mutual funds are the third option for an individual investor with little knowledge of stocks, bonds, or other investment vehicles. Mutual funds pool investor’s money into an account that is managed by a professional fund manager. The fund manager is responsible for buying and selling stocks and bonds that fit the investment strategy and philosophy of the fund. The most important thing to consider when searching for mutual funds is to purchase only no-load funds. These funds have no sales commission charged for trades in and out of the fund. One of the best companies offering only no-load funds is The Vanguard Group. It is important that an individual investor carefully consider the investment strategy of each mutual fund and read each fund’s prospectus prior to purchasing.
For beginning investors with little cash these three methods offer the best places to put your money. Each of these methods offers the investor the ability to have exposure to the stock market, the bond market, or the money market with little need to understand the nuances of each. Individual investors will do well by investing in these types of accounts until they gain more experience and understanding of the other types of more speculative investments.