Your career is taking off, and you’re starting to earn decent money from your efforts at work. As a result, you find that you have more money left over at the end of the month, and your bank account is starting to grow.
Unfortunately, most banks don’t offer interest on savings. They prefer to keep you in debt instead. So, now that you have more money coming in than you know what to do with – what do you do with it?
A Brief Guide to Investing – Risk Vs. Reward
We’ve all heard about investing. The power of putting your money to work for you, rather than working for your money – is an enchanting idea for many. However, most of us have never been positioned to take advantage of the investing climate. So we have no idea on how to invest our reserves.
As the old saying goes, “a fool and his money are soon parted.” How do you know where to put your hard-earned capital? The first thing you need to understand is that a deal that’s sounds too good to be true – will probably end up costing you plenty.
Savvy investors understand the importance of investing in risk. The risk attached to any investment determines your risk/reward ratio. If you’re putting money into an asset, then you want to make more money with it right?
However, some investments may offer outlandish returns exceeding 20-percent. Should you choose to invest in the vehicle, it may cost you all of your money, so is the risk/reward ratio in line with your investing strategy?
Most people don’t like the thought of losing all of their savings. If your risk aversion is high, then you might want to start your investment portfolio with a few low-risk assets, and then diversify into riskier assets as your wealth grows.
The Difference Between Assets and Liabilities
Before we get into the nuts and bolts of investing, it’s vital that you understand the difference between an asset and a liability. The best example of this is your family home. Many people think that because they own their home – it’s an asset.
However, this is far from the truth. You live in your home – so it’s not providing you an income. Instead, you need to spend money on your mortgage, pay the bills, and ensure you meet your property tax obligation. Therefore, your house is a liability because while it appreciates, it still costs you money every month.
An asset would be a home that you rent out to a tenant, receiving positive cash flow every month that you can use to grow your investment account – do you understand the difference?
The Top Investment Assets for First-time Investors
As a newbie investor, the chances are you’re not ready to analyze a real estate deal for a complex of multi-family homes. First-time investors need to start small and build a base of assets that becomes their war-chest. Should anything go wrong with future investments, this war chest provides a cushion for a soft landing and ensures you still have a nest egg for retirement.
As Your wealth grows, you can branch out into each of the other asset classes one at a time, until you have a sufficiently diverse portfolio of assets providing you with capital appreciation and a monthly cash flow return.
Check out this list of investments, and create your investment strategy for the future.
The Safe Option – Invest in Treasury Securities
If you’re looking for the safest place to park your money outside of the bank, United States Treasury securities are an excellent option. Treasuries don’t provide an outstanding return, but they also don’t ever fall in value.
The U.S federal government backs these assets, and it ensures all treasury investors are the primary creditors should the nation ever fall into default. Therefore, if a banking crisis occurs, treasury securities provide you with protection from bank bailouts, where your savings account may be at risk of capture.
During the financial crisis of 2008, some Cypriot banks decided they would give their depositors a “haircut,” and take 50-percent of the value of any account with over 100,000-Euros in deposits.
Read: What are Bonds
You can purchase Treasury securities through the US Treasury’s bond portal Treasury Direct. There are a variety of government bonds available with maturity dates ranging from 30-days to 10-years. Each security has its independent interest rate, and denominations as low as $100 are available for purchase.
The U.S treasury also offers a [product called, “TIPS,” where you can buy insurance to cover changes in interest rates or inflation that may erode the purchasing power of your money. This product is excellent for investors looking at getting involved with long-term securities, such as the ten-year note.
Beginner Level – Invest in Precious Metals
Having government paper in your investment portfolio is an excellent start to building your wealth. However, given the state of the global economy, and the fact that many governments are heavily in debt to the tune of trillions of dollars, hedging your paper investment with hard assets is a prudent strategy to spreading your risk.
Gold is the epitome of hard asset investing. Gold coins come in various weights, from 1-ounce coins to coins that weight 1/10th of an ounce. The yellow metal has a special place in history as sound money, and it’s a far different asset than today’s “fiat” currency.
Read: How to Invest in Gold
However, many people starting with investing don’t have $1,300 to shell out for an ounce of gold, and even spending $130 on a 1/10th-ounce coin may be a bit of a stretch to make for their investment account.
Should you have an interest in precious metals, then start your hard asset portfolio with silver coins instead. Silver is currently very undervalued when compared to its traditional ratio against gold. If you were to believe the calculations, then silver offers far more upside should a financial crisis ever hit and we need to return to sound money for settlement of taxes and private debts.
Make sure you avoid falling into the trap of investing in commemorative coins. Many brokers selling these assets offer outlandish returns on these assets. When investing in precious metals, stick to bullion only.
Beginner Level – Join Your Employers Retirement Plan 401(k)
If you’re starting to earn more money at your job, then why not take advantage of your employer’s investment plan? Most businesses offer a 401(k) retirement plan where you can donate a specified portion of your salary to an investment account each month.
This investment strategy is hands-off, meaning that you have no involvement in the investment strategy, and leave it in the hands of professional advisors. These advisors then take the employers contributions and invest it into a diverse portfolio of assets that may include exposure to financial, property, and other risk markets.
Read: Blooom Review for 401ks
Investment advisors that run 401(k) programs operate like a hedge fund, where their investment strategy covers a variety of asset classes to spread the risk. As a result, your returns may not be out-of-this-world, because some assets make a profit, while others make a loss.
However, because of the savvy investment skills of the advisor, the total fund size keeps increasing, and you receive a portion of those profits. Most 401(k) plans will only pay out at retirement, with stiff penalties for early withdrawals.
Novice Level – Investing in ETF’s
For those amateur investors that want exposure to the markets, but don’t have a significant investment account, consider investing in an Exchange Traded Fund, (ETF.) These investment vehicles allow you to open a brokerage account and trade lots on an ETF, in the same manner as trading stocks.
Most ETF’s, such as gold and silver, are meant for trading over long-term positions, and reduce the amount of trading activity you need to take when compared to a stock market portfolio.
Read: What is an ETF?
ETF’s are excellent to invest in over the medium to short term as well. For example, buying natural gas ETF’s before the start of the winter is a prudent investment strategy that will see the price soar over the winter months as the demand for natural gas rises in the colder parts of the country.
As an ETF investor, you will have to pay commissions that range between $4,00 to $11,00 per trade, which can quickly erode your profits if you make too many trades in the short term. However, for longer-term investments, such as the natural gas example, these fees are minuscule compared to the potential profits on offer.
Expert Level – Day Trading
When your investments start to yield returns, it’s time to for more with your money and seeks higher rates of return on your capital. Day trading offers an attractive option for managing your finances, without the help of a professional advisor.
Day trading involves getting involved in stock, currency, or commodity markets, where you have the opportunity to make money on market movements during the trading day. This step of investing requires you to learn how markets move and to have a firm understanding of price action before you decide to risk your money in the real market.
Day traders need to study an investment course and join a trading team to reduce their risk of making poor investment decisions with their capital.
A good investment course will teach you about money and risk management, as well as how to identify trading opportunities and formulate a profitable trading strategy. You can start day trading with as little as $100, and grow your account to hundreds of thousands of dollars over the course of a decade.
Expert Level – Invest in Property Consortiums
After you’ve got you day trading down and understand how markets move, it’s time to hedge your bets with more hard assets. While novice investors may not be able to afford to invest in property, they can invest in a property consortium.
Various property investment groups launch investment projects to the public. These projects are typically developments they build and then sell to investors at a discount. Investment groups by the entire project and offer it to members of their consortium.
You pay a small sum to be a shareholder in the consortium, and you receive an internal rate of return that can be as high as 20-percent! This strategy gives you exposure to the real estate market, without the inconvenience of actually owning the asset.
You aren’t responsible for maintenance of the property, as the consortium has a management team that runs the day-to-day operations. All you have to do is wait for the check to clear at the end of the month.
Expert Level – Cryptocurrency
The 2017 Bitcoin bubble caught the attention of the world. For the brief three months between September and December of 2017, it seemed like everyone was starting to hear about cryptocurrency.
The bull run in the market started in April, with Bitcoin topping $2,500 after Japan announcing it as an officially recognized currency suitable for trade. As a result, the price started climbing, and by September, one Bitcoin was now worth $10,000.
As the bubble mania hit the world, investors started climbing on board, and the price curve went exponential, exploding to a height of $20,000 by the end of the year.
Unfortunately, the bubble popped, and Bitcoin plummeted down to a low of $3,700 before settling at its current rate of between $4,000 and $5,000 a coin.
While crypto may be volatile, it offers opportunities for savvy traders and long-term “HODL’ers.” Many investors think Bitcoin and crypto are the future of money, and entrepreneurs like Michael Novogratz have large stakes in Bitcoin and other crypto assets.
However, we think its best if you save this type of high-risk investing activity for the last asset class to diversify your portfolio.
Wrapping Up – The Power of Compounding
The power of compounding is the essential principle in investing. As your money grows, it starts to offer exponential returns. While the first five or six years of profits may not be outstanding, eventually you reach a place where you can start taking more significant risks with your capital – for much larger returns.