- INVEST:
Though investing in a savings account is a sure and safe bet, your gains will be minimal given low interest rates. Yet savings accounts are a reliable place for an emergency fund, whereas alternative investments may not be readily accessible.
Once you have established your “emergency” fund, future savings can be invested intelligently. Investing and speculating are two different things, the first is careful assessment of the potential risks and rewards, the second is gambling. “The individual investor should act consistently as an investor and not as a speculator,” said Benjamin Graham.
- Cryptocurrency—Cryptocurrencies are volatile. They don’t pay interest or dividends, nor is there a business model that can generate revenue growth. Crypto may go up, it may go down, unless you have a high tolerance for risk, you are best off steering clear.
- Gold and precious metals—Gold too doesn’t pay a dividend, nor provide income or interest payments. Gains come only through price appreciation. Gold prices can be volatile, driven by fear, geopolitical tensions and speculation.
- Commodities—This area is best left to the subject matter experts who have made careers out of commodity investing. When you trade commodities, you are essentially betting against the experts. Prices can be impacted by politics, national upheaval, and technology change, none of which readily lends itself to forecasting and analysis.
- Stock options and stock shorts—Options are a step removed from stocks. Stocks represent an ownership interest in the net assets of a firm. Options are bets that the stock price may go up or down (called “derivatives”). The value of a near-term option is highly leveraged, and your investment can suddenly disappear, and these instruments have an expiration date.Short positions, since the loss potential is unknown, and could be far higher than you thought possible, they are best left to experienced hedge fund managers and investors seeking to hedge their underlying asset.
- Annuities—Annuities aren’t growth products. Even the best no-load variable annuities have limited investment choices and restrictions on moving the money between separate accounts, and they can be complex and difficult to get out of.
- Stocks—Nvidia is very popular today, and the price has run up like a rocket. Yet it just may turn out that this company, whose revenue is largely dependent upon the AI-based future products and services of our Big Tech firms, may suffer decreasing semiconductor sales if the AI products don’t prove lucrative, such as subscription-based AI services. Individual stock-picking can be risky if challenges arise in terms of competition or demand falling off a company’s product offering.
- ETF—Consider investing in ETFs (exchange-traded funds), especially those offered by Vanguard. The fees are lower than managed funds (mutual funds). You can, for example, invest in an ETF that represents companies around the world. Some companies may not be faring well while others are doing great, this is the advantage of ‘diversification’. Other ETFs might focus on a particular industry, such as tech or real estate. Suffice to say you can find an ETF for any slice of business you are interested in and believe is poised to grow and prosper.
- Money market—Money market accounts can be a good investment option given their safety, liquidity, and higher yields compared to traditional savings accounts. Money market accounts are low-risk investments. They invest in short-term debt securities like Treasury bills, certificates of deposit (CDs), and commercial paper, investments safe and stable. Money market accounts provide easy access to your funds and charge minimal fees. These are widely available through banks, credit unions, and brokerage firms. The top money market funds available, as of May 2024, are:
- Fidelity Money Market Fund (SPRXX): Offers a yield of 5.03 percent.
- Schwab Value Advantage Money Fund Investor (SWVXX): Provides a yield of 5.15 percent.
- Vanguard Federal Money Market Fund (VMFXX): Yields 5.28 percent.
- T. Rowe Price Government Money Fund (PRRXX): Offers a yield of 5.03 percent.
- Bonds—Bonds are a good investment since they pay interest. Treasury bonds are especially safe. Short-term Treasurys are today paying more than 5 percent.
“Know what you own and know why you own it,” said famed investor Peter Lynch.
Do your homework before deciding. And once you’ve decided, make sure to reevaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future. Don’t let your nervous impulses lead you to frequent trading. If the reasons you made the investment in the first place are still valid today, stay the course, even if they may be temporarily down. “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas,” said Paul Samuelson, Noble-Prize winner in economics.
If you think investing is gambling, you’re doing it wrong. The work involved requires planning and patience. However, the gains you see over time are exciting.
Before reading the last part in this series, take these recommendations, and put a “why” in front of them to search the Internet to more fully understand the importance of each. Or contact me at www.linkedin.com/in/roddyrmann.
