Home foreclosures are soaring to record proportions. Unemployment is reaching levels not seen in more than two decades. The U.S. Dollar is slipping against foreign currencies. All in all, not the brightest of economic conditions. However, indications are that we may be reaching the bottom and poised for a turn-around. With this in mind, you might be asking, “What’s a good investment strategy these days?”
There are several factors to consider about your own personal situation before you even start looking into various investment vehicles. The most important of which is your investment goal. In other words, why do you want to invest? What are you plans for the proceeds? Are you saving for a home or kids college or are you preparing for retirement? I suggest writing down what your investment goals are and then determine what time frame you have to accomplish those goals. This will be a huge factor in determining how aggressive or conservative your investments should be.
The more time you have to meet your goals, the more aggressive you can be with your investments. Because time is on your side, you can more easily weather losses for the prospect of bigger gains. However, if your timetable is shorter, preservation of principle will be important and you will want to take less risk. This will also mean lower returns on your money. If you have multiple goals with different time frames, you will need to consider a mix of high yield with more risk along with lower yield vehicles that minimize your exposure to loss of capital.
Another consideration that will have a great deal to do with your decision on investing is the amount of money you will be investing, and if this is a one time investment or if you intend to periodically make additional contributions to your investments. Also, and this is very important, only invest into the market what you can afford to loose. There is no investment anywhere that can guarantee against loss of principle. The only caveat to that statement is investment into U.S. municipal bonds (Munies as they are called), which are backed by the full faith and credit of the U.S. federal government.
The investment vehicles you have to choose from are virtually endless. There are equities (Stocks), corporate and municipal bonds and mutual funds. For the really aggressive investor there are IPOs and SPOs (Initial and Secondary Public Offerings), commodities, options and a host of others.
Stocks are ownership in a particular company. When you buy a share of stock, you essentially own a piece of that company. Depending on the type of stock, you also may or may not have voting rights in the company. You profit from owning stock when it’s value or selling price becomes greater than what you paid for it. However, you also expose yourself to loss of part or all of your investment. In October of 2007, General Motors (GM) was selling for around $40 a share. At this writing, it is selling for little more than $1 per share. See my point?
Corporate Bonds are not ownership in a company but are more like a loan to a company. You buy a bond at less than it’s face value with the expectation of redeeming it for full face value once it reaches maturity. All bonds have a date of maturity. The longer the time to maturity, the less the bond will cost you. Though this may be less exposure to loss of principle than a stock, there is still risk. Any number of things can create an environment that limits or eliminates the issuing company’s ability to satisfy the bond.
Mutual Funds can be a much safer way to invest in the market. The way these work is that a fund is created with a specific investment philosophy in mind. There are funds that invest predominately in stocks or bonds. It may invest in currencies or commodities. It may be a regional fund that invests in companies in the Pacific Rim or Latin America. There are literally hundreds of different mutual funds, all with their own specific investment criteria. Investing into a mutual fund is similar to buying stock, in that you are taking ownership of a piece of the fund. However, your exposure to loss is minimized as the fund invests yours and your fellow fund investor’s money into a variety of vehicles. So if one or a few investments the fund has made loose money, it is offset by other investments inside the fund that have held level or increased in value. There are aggressive funds that can swing wildly between gains and losses as well as conservative funds that post smaller gains or losses but tend to grow in value at a relatively slow but steady pace.
I know this is a rather broad overview and lacks somewhat in detail. I will be providing more detailed information on this subject in future articles if demand dictates. One final note though. Unless you have a lot of time to watch and analyze the market, pour over prospectuses or read 10-Qs and 10-Ks and so forth, I recommend consulting a professional investment advisor.
Disclaimer: I am not a licensed investment professional and the opinions expressed here are my own. There is no intent written or implied to offer any securities or other investments. Always be aware that by investing in any security, you are risking part or all of your investment.
