The ways of investing your money are almost infinite. That is because the financial services industry is innovative, constantly developing new products for you to build wealth. However, there are fundamentals or basic rules of the road on prudent investing.
One of the most important for you is what is known as “asset allocation.” That essentially is the guideline for what percentage of funds to put into what investment vehicle. That formula varies with your tolerance for risk and your age. The biggest part of asset allocation usually concerns equities (stocks) and government and corporate bonds (fixed-income securities).
Since equities are often seen as the highest risk but with the potential for the highest rate of return, financial planners recommend the risk averse avoid single stocks. Instead they should choose stock mutual funds in which the risk is spread. As for the age factor, there is the 110-minus-age approach. If you are 40, then your portfolio can be 70 percent equities. If you are 65, then about 45 percent.
Bonds rarely have the wealth-building potential that stocks do. But they have a place in a balanced portfolio. For example, when interest rates are high, the price of bonds is low. The locked-in yield can make for a solid investment. However, the reverse is usually true in a low-interest environment.
Another kind of investing is paying off high-interest debt. That could be credit card balances and student loans. Eliminating those kinds of debt removes a major obstacle to investing in what does generate wealth.
Real estate, despite the past meltdown in the sector, also can be a lucrative investment. You could be a homeowner whose property could be a major appreciating asset. Or you could be investing in rental property and commercial real estate. The real estate sector, like many business niches, does fluctuate in value. Investors have to be alert to emerging trends and then respond with a hold, sell or buy more.
Certificates of Deposit (CD) can also generate wealth. In addition, the principle and interest are protected by the Federal Deposit Insurance Corporation (FDIC). One investment strategy is to distribute funds over a variety of maturity dates. The objective is to lock in high interest rates if a decline is anticipated and to maximize the amount that could be earned when rates are low. The approach is called “Ladders.”
Savings accounts and money market accounts are standard ways to invest. As with CDs, the principal and interest are protected by FDIC. However there is the risk that the rate of return will not keep up with inflation.
Insurance represents another approach. Typically, you purchase the product known as an “annuity.” In return for “investing” those funds, you receive a set amount monthly until you die or until a stop date you set. Should you die soon after payments start, you are the loser and the insurance company is the winner.
For the sophisticated investor there are the commodities markets such as gold and silver. There are also the currency markets. Investors have been trading in virtual currencies such as bitcoin. In all of this, it is wise to observe master investor Warren Buffett’s advice: Only invest in what you can understand.
In addition, you could become an angel investor in a business. Make sure the terms and conditions, such as what you receive in return, are in writing.
Time has shown that the best ways of investing your money are diversified ones. That is why it can pay to investigate all options. The more you learn, the more you could possibly earn.