To the new investor the universe of choices and options can appear infinite – making it impossible to pick YOUR best investment options. Whether the year be 2014, 2015 or well beyond, there are really only FOUR basic options and that won’t change. So don’t start investing money before we simplify this for you.
As an average or new investor, if you don’t know what your choices are – how are you going to pick the best investment options to reach your financial goals? After all, if you want to get specific, your choices ARE limitless and the universe just keeps expanding. Don’t start investing with this mindset, specifics come later. Start by getting a handle on the big picture; focus on the forest and not the trees for now.
The four basic options, from safest to riskiest: Cash Equivalents & Savings Products, Bonds, Stocks, and Counterbalancing Alternatives. Virtually all of the choices any investor has to choose from can be fit into one of these four general categories. We will gear our examples for each category to the average or new investor to keep things simple.
CASH EQUIVALENTS (simply called “cash”) and SAVINGS PRODUCTS are safe and pay interest. Cash equivalents are very safe, highly liquid (like cash) and short-term in nature. Generally your principal (money invested) is fixed and does not fluctuate in value but your interest rate can change. Your options include: bank checking, savings and money market accounts; as well as T-bills and money market mutual funds. In savings products both your principal and interest rate can be fixed for a period of time. They offer less liquidity, but can offer higher fixed interest rates than cash (equivalents). Examples include: bank CDs, savings bonds, fixed annuities and stable accounts in 401k plans.
Before you start investing money in these safe options, consider when you might need access to your money. If you need quick access, cash offers the best choices. If not, savings products offer the investor the opportunity to safely lock in a higher interest rate. Note to the new investor: in 2014 or even 2015 attractive interest rates may not yet exist… rates have been near record lows (well below normal) for a few years. But eventually, if history again repeats itself, they should rise again to normal levels, or even higher.
BONDS are government or corporate long-term IOUs with a fixed interest rate. The attraction here is higher interest income, with RELATIVE safety. The new investor should note the word “relative”, because the price or value of these investment options fluctuate both up and down (like stocks). Examples include: Treasury bonds, corporate bonds, municipals, high quality and junk bonds. Bond mutual funds offer the average or new investor a simple way to share ownwership in all of the above types of bonds, which makes these funds the best investment options in the bond category for most people.
Before you start investing in bonds or bond funds know this: when interest rates go up, bonds and bond funds will lose money. Period. That’s the way bonds work.
STOCKS represent ownership or equity in a publicly traded corporation, and the financial objective here is to earn a higher return (growth) through price appreciation (stock price going higher) and dividends. Hence, there is significant risk here as stock prices fluctuate and are variable in nature. Over the LONG TERM stocks have rewarded investors with an AVERAGE total return of about 10% a year. Before you start investing money here as a new investor get a handle on the following: that’s a long term average return. As of 2014 stocks gained about 150% in less than 5 years. Before that they lost 50% in about 2 years.
Your choices include: growth stocks, value stocks, foreign stocks, large-cap and small-cap stocks. The best investment options in the stock category for the new investor and the vast majority of investors in general: stock mutual funds. These funds offer you all of the options above (and many more), plus professional money management.
COUNTERBALANCING ALTERNATIVES are the universe of all other options. Wall Street and big investors traditionally paid them little attention and small investors (the rest of us) had trouble getting a handle on a way to quickly and easily buy and sell them. The attraction here is that when stocks and/or bonds are not especially attractive… think 2014 and maybe 2015… these can be the best investment options. They can be risky and their price or value can fluctuate significantly. But they can sometimes march to the beat of a different drummer and go up in value as stocks in general, for example, fall.
The aggressive investor can speculate here, or the smart investor can hold these alternatives as counterbalance to offset other losses in his or her total portfolio. Your options include: gold, silver, real estate, natural resources like oil, copper, aluminum, and a host of other commodities and tangibles. Once again, the average or new investor can start investing money in these areas the simple way: in mutual funds, called specialty stock funds, that specialize in these areas.