Hot Buttered Bonds,
Anyone?
Investors have too much to think about. Where are interest rates
headed? Will the stock market rise or fall? Can investing in mutual
funds save money and free up time? And, that eternal nagging
question: Where to invest?
That last question is stated just as it should be. Not 'what to
buy (or sell)?'. Investing, true enough, is buying with the
intention of selling for capital gains or reaping dividends in some
form. But 'buying' is an activity carried out for consumption.
Investment is undertaken to make a profit.
So, the question becomes, what will return the most profit for a
given risk over a specified span of time? And, the sad but true
answer is: no one knows.
Nevertheless, it is possible to judge the pros and cons and make
moderately well-founded predictions based on history and current
circumstances. So, here goes...
STOCKS
Dozens of thorough studies show that over a span of 10 years or
more stocks in general will outperform any other investment.
Historical returns averaging 12% per year are well-documented. No
bond, real estate, commodity or other investment does so well, on
average.
But there are two drawbacks to that position. Few investors want
to buy a stock and hold it for 10, 20 or more years in order to be
safely assured (to the degree that's possible) of seeing that
return. Second, funds aside for the moment, individuals don't
invest in 'stocks in general', they buy and sell a particular
stock.
So, if stocks are attractive, consider a particular company's
prospects over the time span you select. Technology, and other
social and economic changes, eventually obsoletes every company.
Except, of course, those that change with the times, eventually
becoming an entirely different kind. General Electric no longer
makes most of its revenue from selling light bulbs.
BONDS
Bonds, when well rated (AA or above) by one of the major
agencies, return 4% or better with low risk and semi-annual
interest payments. But assuming a modest 25% tax rate, the return
is already down to 3%. Add the effect of even modest inflation at
2%, and the return is down to 1%. That doesn't even include the
possibility of price depreciation for those who chose to sell prior
to maturity.
Even so, bonds have advantages no other instrument enjoys. Since
they have a set interest rate and maturity date, their behavior is
much more readily predictable, given plausible assumptions about
interest rate changes and other economic factors.
And many millions of skilled investors make substantial sums
through bond investing. For those who can follow their lead, or
carry out their own research, healthy profits are possible with
modest risk.
COMMODITY or CURRENCY
Neither commodity nor currency exchange investing is appropriate
for the novice investor. Period. Though the situation is changing.
See Funds below.
REAL ESTATE
Real estate investing, either through actual property
acquisition or paper investing (via Mortgage Backed Securities,
ETFs - Exchange Traded Funds, IRAs - Individual Retirement Accounts
- or other means) is a stellar way to make substantial gains. But,
for all except those who simply occupy the property, it's a full
time job.
FUNDS
For those with limited time or temperament for research and
investment tracking, funds offer an excellent alternative to direct
investing. Mutual funds, one of the more common types, pool
investor money and diversify investment (usually) into a variety of
instruments: stocks, bonds, currency, commodities, etc.
Investors save money by not incurring a fee for every trade, but
pay management fees of one kind or another (usually annual), and
those can eat substantially into overall returns. Check out each
carefully.
It would be pleasant if the situation were simple. But, if it
ever was it no longer is. As Einstein once said, "A theory should
be as simple as possible, but not simpler."
On the upside, the research and advice available today is better
than ever. With the Internet, individuals can investigate
instruments at least to the degree that helps confirm or contradict
recommendations made by advisers. (Including mine!)
Tread carefully at first, then be bold.
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