Summary. Below is a list that represents a the broad spectrum of financial diversification available for investing and saving money. Much of the information presented here in condensed form was gathered from the Basics of Investing Lesson in the Money 101 Guide offered by Money Magazine which is owned by CNN which is owned by Turner Broadcasting which is owned by Time-Warner which is owned by shareholders. Additional information was gathered from Vanguard.com, and E*TRADE.
Considerations. When investing, consider the following:
- Conditional Performance. What are the economic conditions that determine how your investment will perform? Knowing this allows you to balance your investment portfolio so that it contains a holistic combination of investments that will do well during a variety of economic conditions. Think of it this way, if changes in economic climate are like seasonal changes in the weather, then a diversification of investing will be like having income from a lawn mowing business and a snow removal business. Both are important for producing a full year of income. Economic seasons or cycles typically occur over longer periods of time, although market trends can be like a stone dropped in a pond; causing momentary ups and downs in values of certain investments.
- Costs. How much is your investment costing you? Real estate may go up in value, but how much is it costing to manage and/or maintain. A mutual fund may offer a higher interest rate of earning, yet fees may be as much as six times higher than the cost of having a fund with Vanguard.
- Diversification. Placing your money in a variety of investment options helps to expose you to a mixed degree of risks and also helps balance investments so you can continue earning in just about any economic cycle.
- Dollar Cost Averaging. Investing in something like an Index Fund consistently (weekly or monthly), over a long period of time (5 or 10 years) with the same amount of money being invested at each regular interval, will generally produce better returns than sporadic or emotional investing in stocks.
- Ethics. While some investments may be technically legal, you may want to consider the ethical issues involved. For example, many corporations invest in off-shore tax havens. [source] However, this behavior is looked down upon. Some investors choose to invest in socially responsible funds such as the Vanguard FTSE Social Index Fund (VFTSX).
- Learn More. For more information, read our document on Socially Responsible Green Eco Investing.
- Liquidity – How quickly can you get your money out? For example, real estate is a good investment. However, if you purchase a house, and then the housing values in the neighborhood begin to plummet due to unforeseen circumstances (meth labs and crime), you may have difficulty getting the house sold. Other investments, like CDs are for a specified term such as one year. Generally, an investment that ties up your money for a longer period of time will pay a higher percentage return.
- Quantity – How much money is required to utilize a particular investment? Typically, a larger sum being invested will offer a greater percentage earnings.
- Risks Types – Is there a possibility your investment may be worth less in the future rather than more? Investments that promise potentially higher returns often can result in the greatest losses. One thing to remember about risks is that they are generally time sensitive. For example, if you invest $3000, and you have no specific time when you need that money back, you can ride out an economic downturn, so even if your $3000 investment drops in value to $2000, you aren’t impacted. You can wait to use your money until it reaches a value that represents a 10% return on your investment or higher. An excellent illustration of this is provided on the Vanguard LifeStrategy Funds page. There are generally three kinds of risks.
- Time. One risk involves the risk of having to wait for the value of a fund or stock to rebound before you should try to get your money out.
- Peak Value. Another risk involves being uninformed about a stock and investing heavily in it when it has reached an artificial peak. You may never see your investment increase.
- Business Failure. With some investments, there is a risk that your investment will steadily decline in value. For example, investing heavily in a company that unexpectedly fails would cause you to lose most (or all) of your investment.
Investment and Savings Options. Below are some of the basic investment and savings options. A good learning tool to understand investment options is the Vanguard Funds Interactive Listing because it allows you to see and select from a list of variables such as asset type, risk level, minimum investment, and tax-efficiency.
- Bonds. For most people, Bonds are considered to be a secure investment that produces relatively good earnings. They are generally considered to perform well in economic conditions when stocks may be performing poorly and they offer some tax benefits when you efile in April. [Wikipedia]
- Capitalization Sized Investments. In addition to investing in different industries, it’s generally a good idea to invest in businesses of varying sizes such as:
- Nano Cap – Small public companies having a market capitalization below $50 million.
- Micro Cap – Companies with market capitalizations between $50 million and $300 million.
- Small Cap – Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.
- Mid Cap – A company with a market capitalization between $2 and $10 billion, which is calculated by multiplying the number of a company””s shares outstanding by its stock price. Mid cap is an abbreviation for the term “middle capitalization”.
- Large Cap – A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term “large market capitalization”. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
- Certificate of Deposit. An investment in Certificates of Deposit will offer security, liquidity, but lower interest earnings. Some people will invest monthly in CDs. After a year of doing this, it is possible to reinvest the CDs as they mature. This creates a one-year reserve of income. If you invest 25% of your income every month in CDs, and continue this practice for four years, eventually you will have the equivalent of one-month’s income being reinvested every month into CDs. [ Read more about CDs on Wikipedia ]
- Checking Account. It’s important to have some money accessible and available for recurring expenses. Some checking accounts and/or connected savings accounts will pay interest. As a general rule, it is a good idea to have six months of income available in an account and/or invested in CDs that will be maturing on a monthly basis.
- Index Funds. One of the best long-term investments is an Index fund. Because the index fund fluctuates in value over time, the practical liquidity is limited. So, they are typically not suitable for short-term savings. That said, Index Funds offer low cost, high yield, and typically low risk (if you can ride through short-term downturns).
- Getting Started. Investing in an Index fund can be a simple three-step process that takes about 10 minutes. For example: (1) Setup an online account with Vanguard by providing some basic personal financial details, such as indicating you want to setup a new personal individual account for general savings, (2) choose an index fund such as the Vanguard 500 Index Fund Investor Shares (VFINX), and finally, (3) transfer $3,000 to your Vanguard account by providing your bank routing number and account number typically found at the bottom of your checks. Commentary: Over the past 10 years, other than a significant drop during March 2009 ($62.65), the lowest values of the VFINX are typically from $70 to $80 with high values of about $130 to $140. Given that information, it would appear that beginning to buy in when the value is around $80 would be a good thing. This is a long-term investment fund, and given past performance, it seems that an investor may need to wait several years or more during down times before cashing in on their investment to avoid a loss. Over about 30 years, the VFINX has provided a return of about 10%.
- Money Market Fund. Money market funds typically offer better returns than a traditional savings account. However, if you’re able to take advantage of special offers, such as the 4% earnings mentioned below under Savings Account, then it may be best to limit your money market investments. [Wikipedia]
- Mutual Funds. According to CNN Money, “A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie. Most funds require only moderate minimum investments, from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own. The number of categories is dizzying. Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector, such as technology or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500.” [More]
- Real Estate. For most people, their primary real estate investment is their home. According to CNN Money, “If you can’t commit to remaining in one place for at least a few years, then owning is probably not for you, at least not yet. With the transaction costs of buying and selling a home, you may end up losing money if you sell any sooner – even in a rising market. When prices are falling, it’s an even worse proposition. Home ownership means you no longer pay monthly rent for the roof over your head. You can do what you want with your house (within reason). When you leave, you can sell it to recoup the purchase price and – with any luck – earn a profit too. But don’t kid yourself. Home ownership comes with a slew of disadvantages, responsibilities, and downright headaches. It may make more sense to rent … if you pay 35 percent less in rent than you would for owning – including the monthly mortgage, property taxes, and any homeowner’s fees – then it’s smarter to continue renting.
- Savings Account. People generally don’t put the bulk of their savings in a savings account. Some banks may offer as much as 4% interest on certain savings accounts as long as certain criteria are met. For example, the University of Iowa Community Credit Union will pay 4% interest on your deposited funds if you use your bank card as a credit card instead of a debit card at least twelve times per month.
- Stocks. Stocks generally represent a small part of your investment portfolio. They may perform well when other investments are lagging, but the reverse is also true. An excellent illustration of distributed investments including stocks is provided on the Vanguard LifeStrategy Funds page. Read more about investing in stocks at CNN Money.
- Socially Responsible Funds. There are many companies around the world today that harm the environment, exploit workers, produce harmful products, and engage in generally unethical practices. If you’re seeking pure profits and earnings, you may not be concerned about such things. However, Socially Responsible Investment funds have been created for investors who feel better about investments that make the world a better place. Another advantage of Socially Responsible Investments is that they generally perform better than other investments. For more information, read Socially Responsible Green Eco Investing.
Resources. Below are some investment information resources.
- Betterment.com – “We knew that the way to build a better solution was through the use of smarter technology. We built an experience that replaced confusion with delight, and uncertainty with control. In 2010, Betterment was still just an idea. We now provide more and more people each month with a smarter way to invest, and we help them invest billions of dollars to achieve their goals. We’ve redefined the investing landscape, and we’re just getting started.” (source)
- Business Week > Investor – News about the investing industry.
- CNN > Money 101 – An excellent online guide to investing and finance.
- E*TRADE – Approximately 4.5 million people have invested about $100 billion dollars through accounts with E*TRADE. The education and information resources offered by E*TRADE are designed to create an educated investing group. For example, E*TRADE offers video training tutorials on topics such as Options and Technical Analysis.
- Fidelity.com – “Fidelity offers a full range of financial products to help you with all your financial needs no matter where you are in life. Whether you are investing, planning for and living in retirement, or just saving for college we have a solution for you. Learn more about why Fidelity is the right financial partner for you.”
- Fortune Magazine – “Our trademark stock portfolio, which weathered a tough year in the markets, provides a strategy that will help you drive out of today’s uncertainty and into a sunnier future.”
- Investopedia.com – “Investopedia is a resource for investing education, personal finance, market analysis, and free trading simulators. With a comprehensive financial dictionary, exam preparation materials, and active trading strategies, it is a leading destination for investors.”
- Kiplinger.com “For eight decades, the Kiplinger organization has led the way in personal finance and business forecasting. Founded in 1920 by W.M. Kiplinger, the company developed one of the nation’s first successful newsletters in modern times. The Kiplinger Letter, launched in 1923, remains the longest continually published newsletter in the United States. In 1947, Kiplinger’s created the nation’s first personal finance magazine. Located in the heart of our nation’s capital, the Kiplinger editors remain dedicated to delivering sound, unbiased advice for your family and your business in clear, concise language.”
- MSN Money Central – News about the investing industry as well as articles about investing.
- Scottrade.com – “As a leading online brokerage firm, Scottrade offers a full line of investment products, online trading platforms and market research tools to help investors take control of their financial future. Scottrade’s dedication to excellence is what truly makes us stand apart from other brokerage firms and better serve our customers, employees and communities.”
- Schwab.com – “Here, you can enjoy a personal relationship with our investment professionals. We see investing from your perspective, and make recommendations based on actually listening to you and understanding your needs. Experience ease and convenience—from opening your account to accessing top research. To all investors, we offer investment guidance and portfolio planning. If you want us to manage your portfolio, we also offer investment management services. Our goal is simple: to give you everything you need to do better.”
- ShareBuilder.com – “Many Americans believe that investing is an activity that’s out of their reach. At ShareBuilder we are changing that perception. We believe everyone should be able to invest and that’s why we’ve created an investment service that has eliminated account minimums, reduced commissions and doesn’t have maintenance fees. We’re dedicated to making investing easy and affordable for everyone.”
- Vanguard.com – “While no one has the power to dictate the market’s daily ups and downs, you can control how much you pay to invest. Unfortunately, many investors simply don’t notice mutual fund costs, since they’re not billed directly. But a fund’s operating expenses are paid out of its investment returns. That means lower costs let investors keep more of their returns over time. At Vanguard, we’ve built a reputation for helping investors reach their goals by keeping down the cost of investing. It’s not just good business—it’s a Simple Truth.”
- Wealthfront.com – “Our software manages your investment account for you 24/7, around the clock. We’ll do all the work so that you can focus on the other things that really matter to you. Investing shouldn’t be expensive. We provide investment management at a fraction of the cost of traditional investment managers. We manage your account with taxes in mind because minimizing your taxes is a key part of maximizing your long-term investment returns. We believe it should be easy to view all of your investment accounts in one place, have complete transparency into the fees you’re paying, and view every transaction Wealthfront makes on your behalf, so that you can keep your accounts balanced and optimized for long-term performance. Our service is premised on the consistent and overwhelming research, which shows that index funds significantly outperform an actively managed portfolio. We employ ETFs that track indexes for the 11 major asset classes used in our portfolios. Each ETF is chosen by our investment research team based on its relative cost, tracking error, market liquidity, and securities lending policies.” (source)
- Wikipedia > Investment – “The term “investment” is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.” [More]
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