You can secure your future by investing wisely. If you are determined and dedicated, and have sound information, you can be successful. In this economic downturn look for investment bargains and patiently wait for a big return for your money. Whether you decide to invest in stocks, bonds, annuities, real estate, gold, or real estate trust funds, you must understand the risks, and know how much risk you can endure. Whatever investment strategy you may use, a key to wealth building is to continue putting in a fixed amount of money at regular intervals. Consistency and knowledge are the keys to success!
LET’S LOOK AT STOCKS
Before purchasing any stock, it is prudent to check its record. Most libraries have the proprietary publication “Value Line Investment Survey,” as well as others, to help you research companies. Look for companies whose earnings surpass analyst’s expectations. Wise investors should examine stocks using the following criteria.
A. Earnings
Profit increases should average 20% or greater during a five year period.
B. Capitalization
Look for at least a $100 million capitalization.
C. P/E Ratio
Remember that a stock selling for more than 20 times its earnings is expensive, while one selling for less than 10 times is a bargain.
D. Return on equity
A return of 15% on equity is good, 30% is great. A good return on equity proves that the management is handling the shareholders money wisely.
E. Debt to equity ratio
A company’s long-term debt shouldn’t be higher than the total value of its common stock.
The following are examples of portfolios from the T. Rowe Price company from 1974-1994. Depending on your particular situation, choose a low, medium or high risk portfolio.
Low risk portfolios keep 35% in cash, 40% in bonds and 25% in U.S. and foreign stocks. The average annual growth is 11.2%. In its worst single year it gained 2.9%. Retired adults who may need to use their money in the near future usually hold this blend of investments.
Moderate risk portfolios keep 20% in cash, 40% in bonds and 40% in U.S. and foreign stocks. Its average annual return is 12.4%. In its worst year it gained 1.7%. Younger investors with a higher risk tolerance would be more inclined to use this mix.
High-risk portfolios keep 10% in cash, 30% in bonds, 60% in U.S. and foreign stocks. Its average annualized return was 13.5%, but in its worst year lost 1.8%. Aggressive investors that tend to use this type of portfolio usually gain more profits, but run the risk of losing money at certain times.
Pros: Stock sales and earnings grow faster than the economy in general. Due to their explosive growth they have a higher price to earnings ratio (P/E) than average. There are many great new companies starting up every day. A penny stock can turn into a high cap stock in no time.
Cons: Choosing which particular stocks to buy out of thousands may seem daunting. It takes many research hours to pick the right stocks. Stocks are volatile. When the market falls, young dynamic companies plunge.
BONDS AS AN INVESTMENT ALTERNATIVE
Many companies, as well as the US government sell bonds as a way to raise money. A bond, basically a long-term IOU, matures at a future date and has a fixed interest rate. Stay with bonds that have a quality rating of AAA or AA. Try to spread your bond investment over a range of maturities, from as short as two years to no longer than 10 years. To get the highest yields on your bonds, invest for as short a term as possible when rates are rising. Then, when you feel rates have peaked and are about to drop, move into longer-term securities, to lock in those high yields and reap capital gains.
Pros Bonds can be a good source of fixed cash flow and a good hedge against deflation. If, for example, you buy a new 30-year corporate bond at its face value of $1,000 and it pays 5% interest, you will collect $50 a year until the bond matures or comes due.
Cons If interest rates rise, your bond will decrease in value. To get the highest yields on your bonds, invest for as short a term as possible when rates are rising. Then, when you feel rates have peaked and are about to drop, move into longer-term securities, to lock in those high yields and reap capital gains. Bonds can be risky.
ANNUITIES AS SAFE INVESTMENTS
Before investing in annuities, use this checklist. There are many things to consider when investing your money for retirement.
A. You must invest for the long-term (at least 10 years). Decide whether you can hold this annuity until age 59 1/2.
B. Initially, you should contribute the maximum amount of money allowed to a 401(k) or an IRA. These may be more efficient shelters than annuities.
C. Buy aggressive funds with strong records of growth to balance the costs of annuities.
D. Watch out for high expenses. The higher the fees, the longer it will take to realize net gains.
Pros: Annuities do offer safety. If you fear volatility, you may want to invest in annuities. The idea of receiving high interest, tax-deferred, monthly checks for life may appeal to you. When you retire an annuity check will come in very handy.
Cons: Annuities do not often match the performance of good stock mutual funds. Annuities, which pay you income for a specified time and offer a fixed or variable return, may not be suitable for you. You may, for instance, need to withdraw your money early for your kids’ college education. There are severe penalties for early withdrawals. Annuities are not your best investment, unless you can leave them untouched.
REAL PROFITS FROM REAL ESTATE
Real estate has historically increased in value faster than any other secure type of investment. As the standard of living increases, your property value increases. It’s pretty hard to lose money in a real estate investment.
Pros: Real estate investing has produced more profits than almost any other investment. Real estate offers both income and appreciation.
If you own rental property you can deduct mortgage interest, taxes and expenses. Professional advice will help you greatly. If you have any net losses, you can carry them to next year. The recent Housing and Economic Recovery Act of 2008 provides a $7,500 tax credit for first time buyers, and emergency assistance for redevelopment properties.
A wise real estate investor should be patient, staying focused on long-term gains and consistent annual income. Pay attention to your financing. Shop around for the best mortgage.
Try to invest near your own town. This is beneficial because you’ll have less travel, and probably know the area. Also you will be able to keep an eye on local real estate prices. In any case, make sure the area is stable, and not a high crime area.
Cons: Buying old buildings and fixing them up can be very profitable, but look for hidden problems that are not so easy to fix, like termites or poor foundations. Get an expert’s opinion.
Interview prospective tenants carefully. Check their references. Inspect the premises often. A destructive renter can ruin your investment. You may even prefer to hire professional managers, although it may cost 20% of the rent for a single family dwelling.
REAL ESTATE INVESTMENT TRUSTS
If being a landlord doesn’t appeal to you, but real estate does, consider real estate investment trusts, or REIT’s. REIT’s are similar to closed-end mutual funds. They are a portfolio of real estate or mortgages rather than stocks or bonds. Their shares are traded on exchanges just like common stocks. Ideally, you should diversify into at least a half-dozen REIT’s.
Pros: REIT’s normally generate dividends of 6% to 9%. Approximately half of cash distributions can be sheltered. When properties are sold, you participate in the profits.
You can learn more from the National Association of Real Estate Investment Trusts in Washington D.C. They make available a book titled “REIT Basics.”
Cons: Because their prospectuses may not reveal all you need to know, you may prefer finding skilled managers which can be expensive.
Estate planners can assess your financial situation, and help you obtain appropriate insurance, so your investments are protected if anything happens to you. This way your spouse and children won’t have to see large bulks of your estate go to various government taxes.
These investment alternatives have varying degrees of risk and return on investment. After deciding on your risk tolerance and examining the rate of return on each type of investment, you can choose the vehicle that will work best for your investment goals.