by John Savage, CFHC and General Lines Insurance Agent
Investment Basics
When it comes to investing, many people don’t realize what it takes to invest, where to start, or what percentage of their money they should be investing. Before getting started, I encourage clients to ask themselves why they want to invest? It is important to set some goals with clear targets of what you are ultimately wanting to accomplish with each investment. If you don’t know where you’re going, you’ll never get there.
There are many different investment vehicles out there, all with a different purpose. Then there are those investment products that are out there that are very similar from one company to the next. From there, it gets down to a few factors which I have listed below:
What’s your risk tolerance level?
What experience do you have with investing?
Do you have some goals for investing?
Are you more patient with money or more emotional about money?
Are you trying to invest for the long-term or short term?
Does your company offer direct investing?
Do you have plenty of money in your current budget or are you living paycheck to paycheck?
Do you have debts you need to prioritize paying off or are your debt free spending your extra money?
Do you have any current emergency savings?
With that in mind, I have provided a few different types of investments one needs to consider before they decide to invest because depending on your goals, needs, and budget, there are certain products that make sense and others that won’t. It’s like a light socket, not every plug can be universally plugged into any socket. Each plug has a different purpose based on the source you are trying to connect it with. If you plug in the wrong device, you could lose it due to being overpowered and inexperienced as is the case of a 14 teen year old kid I know who tried to plug an American made, Montgomery Ward TV into a 120 volt, German housing socket. Let's just say, he was no longer watching that television for some time.
So, it is with investing, if you have your money in the wrong place and don’t understand what you are doing, you can lose much of your hard earn funds, in some cases, you could end up owing more. Let’s look at a few different types of investment products below.
Common Stock – common stocks are some of the most common stocks out their is available to the average investor. These are great for investing in established companies that need to raise capital as they continue growing their company. When a company earns profits, you can see realized gains in your stock portfolio, if the company is managed well and has in demand products and services with growth year-over-year.
Before investing, it is important to know what you are interested in, what you skill level is, and how much you are willing to invest in the market. Stock can be a great way to earn profits and grow your income portfolio over time. It is best to buy and hold but many people want to make fast cash instead of being consistent as steady. The good thing about investing in Common stock as well is that if you are in needs of funds for an emergency, it can be easier to sell your funds and pull the cash out to take care of your needs versus having money stuck in an retirement contract where you may or may not have access to your funds right away or if at all.
Another great thing about investing in stocks is that they can also yield dividends for company that are older and more established such as McDonalds (MCD), ATT (T), Riley (RILY) Financial, Exon Mobile (XOM), Ellington Financial (EFC), Verizon (VZ), Johnson & Johnson (JNJ), and Walmart (WMT) just to name a few. These particular stocks are no longer considered growth stocks to dividends could be a great source of income.
Preferred Stock – These stocks are great for not only retaining equity shares in a younger company, but you also have first right of refusal when it comes to converting your shares into common stock later on as the company grows but you also lock in a guaranteed fixed dividend rates for the future or extended period of time, typically for at least 5 years unless the shares are have a recallable feature at which point the company could by the shares back any time in the future. Preferred stock holders area also paid before common stock holders in the event a company defaults on its bills and needs to pay its creditors first but they will still be one of the last in succession to get paid.
One last thing to consider is that many start-up companies or growth companies offer preferred shares as well. These always come with more upfront risk since they companies are young and tend to retain their earnings for some time before paying out any dividends. Also, investing in start-up companies typically requires minimum capital of $10k and above which for most people, do not have that kind of money to get in on the ground floor of a budding company.
Options – Options are can be a great alternative to direct stock investing by allowing the average, retail investor to invest in stocks with out having a large stash of funds of funds to purchase direct shares. For example, when you purchase options, they allow you to buy contracts that represent 100 share per lot, 1 lot equals the equivalent of 100 shares of that particular underlaying stock you are investing in without actually buy the stock. It is stated as, "giving you the right but not the obligation to buy the underlying asset," which makes it a more affordable option to invest in the desired company with retaining the high cost of purchases and owning shares directly.
Even though this is a great alternative, you still need to be paying attention to the markets and realize that options have an expiration date in which they will expire worthless unlick stock both common and preferred, where you can hold on to them indefinitely. Based on the option you choose and the current market risk factors, your cost can be high or low relative to what may be typical in a strong economy and stable market. It is important to pick a solid strategy for the options you choose so you can then create an exit strategy based on how well that particular industry is doing, earnings calls, and time to expire among other key factor that could be at play.
Options always expire on Friday as a rule and can have a time table of 100 week or two or more years. The shorter the time period, the riskier the paly typically is, the longer the play, the lower the risk and more time you have to research, monitor and study the company you are invested in, and outlook you have to determine whether you should sell or hold those options after a period of time. Keep in the closer you get to the expiration date of a particular option, the less value it retains. This is not including ESOPPs which can also be a great long-term investment if you are an employee with your company. These usually have a vesting schedule and you have the right to purchase the at a discount and they do not expire or have to be exercised right away as may be the case for outsider not associate with the company.
REITS – REITS are another great option for accumulating assets and earning an income. The are security vehicles that both own are operate investments in Real Estate and property yielding an income. REAITs are a great way to invest in real estate or other income producing properties both residential and commercial without actually having the funds to go out and by the assets direct. They are also great because not only do you own the underlying asset but you are also guaranteed income payments from profits earned on a quarterly or monthly basis. One thing to keep in mind that, they are more sensitive to market volatility such as interest rates since properties have associated taxes and are constantly bought and sold based on prices in the market. This can make the more sensitive when it comes to paying taxes on any realized gains. All REITs are not the same so do your research before you decide one to invest in since they can be tied to medical, commercial and residential real estate, hotels, stores, and more.
Bonds – Bonds are great vehicles to invest in especially when you want to earl and retain income over a long period of time. When there is a down market, you usually will have a great discount rate since you are loaning money to the government or municipality with a future rate of return based on their face amount at the time of purchase. Bonds are a good hedge because they are more stable over time compared to the stock market.
CD’s – CD's are great for locking in your interest rates during high interest rates hikes and a more volatile economy. CD's are also good for retaining the vale of your money that you may have pull out of a stock, bond, or some other vehicle fi you are not sure what you want to do next with your money but you don't want to lose the value of your purchases power while you decide. This is why you will see different CD's at slightly different rates, the shorter CD"s give you time to decide where you want to appropriate those funds next while not having your money tied up for too long. If you decided you do not need the funds and you want to leave them, they will continue on for the designated period of time you choses or based on the terms of the agreement when your due dates comes due.
The great thing about CD's too is that unlike a regular savings account, your rates are locked in at the time you purchased them regardless of any later fluctuations on the interest rates which means more capital gains. CD's allow you to be somewhat liquid and access to funds if you need them in case of emergency minus any potential fees and taxes on any gains if needed versus having all your money in a Retirement account that may not be accessible depending on where those funds are in a state sponsored plan, a TSP, 401k, 403B or 403A (states sponsored and funds typically not accessible and have required minimum contributions), etc.
High Yield Savings – These are great because it is important to have some significant liquidity in your portfolio in case of emergencies or other important or urgent matters. You also get the satisfaction of earning some interest on your money while it sits in the account. Keep in mind, the rates can adn do change based on changes in current interest rates at that time.
Cryptocurrency – This is obviously a much more recent incumbent alternative asset class on the scene which currently has a lot of volatility, unknowns, and risk associated and is still in the process of major user adoption which will be gin to see faster adoption rates over the next 24 months as more people learn about what cryptocurrency is and how it can benefit are society and lowered fees in as an overhaul to our antiquated financial system. Make sure you know what investments you are getting into to before you dive in. Cryptocurrency investments are at an all time low and this is a great time to dip your toes in the water and then hold for the next 24 months to see what type of gains you can realize if you so choose to. Just know before you buy and understand where and how to properly invest.
Gold, Silver, and Precious Metals – These have always been a safe haven even before time itself, read Revelations. Any high end preciously metals are a safe hedge against any unstable economy and market volatility. Not only to they hold their value well, they have many properties and in some cases, health benefits. Did you know that Gold is not the most expenses or prized metal currently on the market, Rhodium is, in fact, it is more rare than Gold and harder to get right now due to it being over $6k per once not including spot price.
These rare early metals are fire proof, used in computers, and smart phones, have less risk of being destroyed in water, floods, storms, etc. because they are virtually indestructible which is while the government will spare no expenses to retain what was once owned by so many people prior the 1971 dollarization of our currency to eliminate our ability to be able to barter and there fore not need the involvement of the federal government which also meant, lest dependency or obligation to taxes.
Land – Land can be a great investment but there are taxes associated and other cost involved with insurance, maintenance, zoning, etc. depending on the type of property, location, state, size, and specific financial condition at the time of purchase. Land is something you need to hold long-term to realize is true value which may include cost to determine mineral rights, geological testing, accrued insurance cost, etc.
Real Estate - This type of investment can be ideal if you have the liquid assets and resources to manage, maintain, insure, and upkeep with the taxes, cost and other funds, and other responsibilities associated with your specific retained asset. Know your purpose for why you have retained such assets, keep of with the cost of any incurred taxes based on your zip code, and make sure you are the right amount and proper insurance coverages in place to protect you in case of a specific life event or external factors that can affect any assets with in your portfolio such as ungrateful renters, hurricanes, floods, systems failures, wind, rain, hail, fire, mold, pest, hydrostatic water, etc.
It you do not properly care for, prevent, and maintain your properties and your systems, you could find yourself coming out of pocket for what would be an other wise covered event by voiding your contract due to your "failure to properly maintain." What ever investment vehicles you choose and can afford, make sure you have the means, time, and resources to properly manage and keep up with those investments and ultimately, know your exit strategy, and if you have any type of trust or estate plan in place, make sure you update your investments and account in the "pour over will" section of your trust.