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Steps for Making a Good First Investment
Posted by Investing on March 16th, 2012
inI have been asked many times “What’s a good first investment?” It would be easy to say that stocks, mutual funds, or some other asset would be a good first investment, but most people don’t even understand the question they are asking in the first place. Most people asking that question don’t realize that they have already made many investments in their lives – only they don’t know it. The question they should be asking is, “What is the right next investment for me?” That question is usually a little easier to answer depending on how well I know the person. What’s the next right investment for you? Read on and try to see where your life experiences fall in the selections below.
A Right Next Investment for Me Is: Better Tools
Someone aiming to put money to work for them via investing would be well advised to have the resources to track and manage any investments made before making them. What is the bare minimum amount of tools needed to make investments? Howabout a computer? Internet access? Do you have a basic home finance software package? Are you capable of using tax software or are you willing to use a tax preparation service to assist you? Are you willing to keep good records using your financial software?
If you answered yes to all these questions then you should read on. If not, your decision is already made for you: you need all of the tools above to make a good first investment, so the next right investment for you is more tools. Once you have all the things listed above, it’s time to expand your horizons.
A Good First Investment for Me Is: My First Online Account(s)
So you have a computer, finance software, internet access, and a tax accountant or software or service. At this point you have all the tools you need to make your first investments without getting tripped up by them later on. At this point it’s time to bite the bullet and commit some money to an online account. How much money do you have to commit? Are you sure you can live without this money for an extended period of time – because that is what you are committing yourself to doing.
Many would think I am utterly boring for suggesting this – but your first online account should almost certainly be an online high yield savings account. With all the fancy investments in the world out there, why on earth would I suggest a boring, dingy old savings account as a good first investment? Simple. You need to find out if you really can live without the money you are committing to invest. If you find out a month from now you desperately need that money, you can get it back quickly from a savings account. You likely won’t be able to get your money back without a significant penalty from almost any other kind of investment account. An online savings account is a highly liquid (easily available) investment which (by being online) is not available to you for immediate withdrawal. It is a good test of whether you really can live without the money you want to invest. If you’re short on funds to invest, here are some ideas for how to start investing with little money.
At this point you have the tools you need to successfully manage an investment, and if you have created a savings account and lived without the money for a while odds are you don’t and won’t have an immediate need for the funds. Now is the point where you can think about making riskier investments.
A Good First Investment for Me Is: More Self Knowledge
Here you have arrived at a major fork in the road. You need to ask yourself, “What am I trying to accomplish with my investment and how long a time commitment am I willing to make with this money?” The answers to these questions are critical in making a decision about what is the next right investment for you. A good investment might be opening an investment account. It might mean converting some of your online savings account funds into a high return CD. There are so many different types of investments out there it makes the odds of finding a choice that suits your goals and commitment level very good. Just how wide a variety of choices are there? Here’s a short list – in increasing amounts of time commitment:
Hourly / Daily Options / Weekly Options / Monthly / Quarterly Options – pay high yields but come with high risk (enroll in a free options trading tutorial)
High Rate CDs – Safe low yields but usually have penalties for early withdrawal
Leveraged ETFs – Offer high returns and diversity in a simple, single investment
Mutual funds – Similar to ETFs but have annual tax complications
Savings Bonds – Can be bought directly from the Government but have multi-year time commitment (or penalties) – also pay very low yield (right now).
Investments to Avoid Initially:
Stocks – Require a great deal of research and large capital commitment
Bonds – See stocks, but think even bigger capital and time commitment
Real Estate – Much like stocks and bonds – lots of money and knowledge needed – with great risks today
No Comments updated August 20, 2014
Debt Ceiling Haiku
Today a haiku poem on the United States Debt Ceiling Debate:
Bush Tax Cuts and Earmarks
Cheney Makes War in Afganistan and Iraq
United States Debt Crushes Hope
I’ve never written a haiku before… how did I do?
2 Comments updated July 26, 2011
IRA CD Account / Savings Account Blog and a Whole Lot More
Posted by Investing on December 1st, 2009
inI’m taking a moment to announce a series of blogs on IRA CD account usage and online savings accounts in combination with a regular IRA or 401K portfolio (or mutual funds). In today’s high risk investing environment and atmosphere I am very concerned with the high level of risk many boomers and younger 40 somethings are willing to take with their nest eggs.
IRA CD Combined with a Risky Asset Portfolio – The Whole Is Greater Than the Sum of the Individual Parts
A portfolio is capable of a great return on investment without necessarily taking on undue amounts of risk. This is done typically by matching an essentially no risk asset such as an IRA CD or online savings account or money market account (paying low fixed interest rate income) with a set risky portfolio such as a group of stocks or mutual funds. When done correctly matching a risk balance optimized (or efficient) portfolio with a fixed asset security essentially creates a two-asset portfolio with a linear relationship between risk and return.
A Standalone IRA CD or Standalone Mutual Fund or Stock Portfolio Leaves a HUGE Hole in the Risk Return Profile/Frontier
Contrast the mixed risk-free / risky asset portfolio combination with a standalone risky asset portfolio. Note how the return on investment prospects are non-existant from a zero level of risk essentially out to some mathematical limit of the effectiveness of the portfolio. The magic of combining the IRA CD or high interest savings account (or online money market account for that matter) is that the portion of the risky portfolio which is least efficient (providing the least return for each additional unit of risk) gets ignored and is supplanted by the combined portfolio of the risky and risk-free asset. Not having a risk free asset in combination with the portfolio of risky assets leaves a barren gap of highly desirable risk/return possibilities where the investor has no options between no risk at all (a simple IRA CD or savings account / money market account) and the highly risky portfolio with wildly variable expected returns.
For Further Reading on Fixed Income Assets (CDs, Savings Accounts, and Money Market Accounts) See:
IRA CDs and Improving Risk/Return Frontiers in Retirement Accounts
Savings Account Information for Parents Who Want to Raise Financially Prepared Children
Keeping Tabs on Best Savings Account Rates Online
Highest Return CD Column / Blog
No Comments updated July 26, 2013
Understanding How to Use a High Rate CD in an Investment Portfolio
Posted by Investing on November 24th, 2009
inGiven the question came from my friends at kidssavingsaccount.info I offered to write a guest post on the topic and explain how a high interest savings account or high rate CD could function to improve the risk/return profile of a risky asset portfolio.
What I discuss is what the risk/return profile looks like when you take a risky asset portfolio and allocate some portion of the investment in a ‘risk-free’ asset such as a CD and the remainder in your efficient portfolio of risky assets. KidsSavingsAccount.info probably isn’t the right venue for such a high level discussion true, but we aren’t really getting into the mechanics of how these portfolios are created – we only discuss what the expected performance of said portfolios looks like, and how a fixed income asset can enhance that picture. Clear as mud, right?
Think of it another way. You don’t have to know how an engine works to use a car to get from point a to point b – but you do have to be able to recognize that a car needs an engine to move. Likewise an efficient portfolio needs to be paired with a risk-free asset or fixed income asset to acheive an optimal profile picture.
1 Comment updated November 24, 2009