Investment Advice

This page will give you some investment advice that will get you started in growing wealth.

Investing is an important part of growing wealth because it allows your money to work for you while you are doing something else.

Please understand that I am NOT an advisor and will not give specific investment advice. Instead, I give you some pointers on how to make good decisions.

Managing Risk

The best advice you will get is to understand that all investing includes risk management. Risk management is at the center of making good decisions with your money and growing your wealth. That means that growing wealth and good financial decisions both require you to take risks when they are profitable and avoid risk that will destroy wealth.

Of course there are many types of risk. Risk management doesn’t mean just ensuring that your investment never drops in value. That is only one type of risk.

It also means managing the risk that inflation will erode the purchasing power of your money, or the risk that the government will take a huge chunk of your return, or the risk that money you earn won’t be able to be put back to work at the current rate.

Take a Tip from the Pros

The best investment advice comes from the pros. I believe in the strategies of Peter Lynch and Warren Buffet who say you should put your money into things you know. Both of these investors became wealthy by avoiding things they didn't understand.

What this means is don’t follow trends just because everyone else is. Chances are you won’t understand it and you won’t get out when you need to. For example, if everyone is buying Biotech companies but you don’t know what biotech is, look elsewhere.

If you are a real estate agent, real estate should probably be your main investment. If you know a lot about skate boards, for example, you should look into skate board companies.

Maybe there is a great one out there that you could purchase shares in or loan money to. (Be careful. Just because someone makes a great skate board doesn’t mean they know the first thing about how to make money by selling this skateboard. Find the investments that make money, not just good products!)

Don’t be Afraid to Take Risk

When you know a particular situation very well and you know it’s a good time to put some money into it, don’t be afraid to bet big.

Sure you may be wrong but if you have done your homework and understand the investment, you will be right much more than you will be wrong.

The common investment advice you will get from professionals is to diversify away all your risk to protect against losing money.

Forget about the fact that this is impossible, even if it were possible you will end up diversifying away any chance of profit. Don’t be afraid to take a risk if an opportunity presents itself.

Of course, that doesn’t mean you should bet everything on any one thing. It never hurts to have something in reserve in case things go wrong or in case another opportunity presents itself.

Warren Buffet often says that if everyone is selling, it must be a good time to buy and if everyone is buying it must be time to sell. Seems like pretty good investment advice to me! But in order to use this strategy, you must have funds in reserve that can be used in case this happens.

Liquidity

One of the biggest errors people make when investing is that they don’t value liquidity. What I mean is that people often put money into things that lock up their money for a long time.

This is a huge mistake. You have no idea what the future may bring. How can you know for sure what you will be doing with your money in 5 or 10 years or more?

Too many young people begin contributing to an IRA or a 401k before they have any real money in the bank. But you can’t access that money until you turn 60 years old! (unless you pay enormous fees)

Many insurance products charge huge fees to access your money. Real estate is extremely illiquid because if you have to sell it, you may not be able to and even if you can, it may take months.

The problem with illiquid assets is that if you lose your job you risk significant losses or even bankruptcy. In addition, if a great deal comes along, or if you change your mind on what you want to do with the money in that investment, you may cost yourself a great deal of wealth.

That doesn’t mean you shouldn’t put anything into illiquid assets. It just means you should build up some liquid assets before building the illiquid ones.

Managing Risks

Weigh the risks. For example, government bonds are very safe because you won’t lose money if you hold them to maturity. The reason people often don’t invest in them is because they generally pay very low rates of return (1 to 5% right now).

The stock market on the other hand, is very risky but may result in a 10% rate of return over the long run.

So if government bonds were paying 9%, why would you take all that risk in the stock market? There have actually been times in history when government bonds paid 12% and more.

You have to wonder why anyone would have invested in the stock market when this happened. (The reason why was that inflation was so high during this time and was rising so fast that many thought these bonds were a bad investment. They were wrong.)

The point is that all appreciable assets can be a good place to grow your wealth at some point. And how good of an investment it is depends on your knowledge and point of view and the value of that investment relative to other investments.

Where to Start

Remember that there are a million ways to invest and a million different investments to choose from. Cash, stocks, bonds, mutual funds, annuities, closed end funds, exchange traded funds, real estate, commodities, futures and options are only a few of the investment types available to everyone.

And everyone wants to sell you investment advice. Stick with things you know and start simple.

This means don’t jump into some complex strategy that you barely understand just because some broker told you it would make you rich.

Remember, the brokers make their living by generating fees and commissions. Of course they have to get paid but some of them have complex strategies that make them a lot of money and you very little.

If you don’t know anything about investments and aren’t interested in learning, start with CDs at the bank. These are relatively safe in terms of losing money because they are insured by the government and tend to pay a little more than bank accounts.

CD’s are a little less liquid because you have to leave your money in them for a period of time so don’t put everything in them and get multiple CD’s for varying lengths of time.

After you have built up some money, talk to a financial professional about doing some conservative mutual funds. Maybe start with a bond fund or a balanced fund (which invests in some stocks and some bonds.)

If you are a beginner, you shouldn’t ever put all of your money into the stock market. You can put some in but make sure to keep something that grows every year and never goes down. Be wary of investment advice that tells you to put all your money into one type of investment.

Be careful accepting investment advice from friends with little experience. Just because someone got lucky on one investment doesn't mean they know what the next big thing is. Use your own research skills or talk to a professional when looking for specific investment advice.

Fees

Pay attention to fees. When dealing with an investment professional or insurance professional, make sure to ask what the costs are.

No investment is free. Many investments charge a fee that they take out each day. You will usually never see these fees come out but they are definitely being charged.

There are investments out there that can charge as much as 3.5% of your investment per year. It’s really difficult to grow your money when you are paying out that much to others.

That doesn’t mean you should always go with the cheapest investment or take the cheapest investment advice but make sure you understand how much it’s costing you before you sign on.