Creating a Financial Future--Putting Your Plan Into Action Part 2

Scott Pearson
 


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Real Estate can be a useful tool for investing. The simplest real estate investment is not truly an investment, but a cost-reduction – that is owning your own home. Buying rather than renting allows one to put residential costs toward assets rather than into someone else’s pocket. However, if interest is high, the amount you pay to borrow money could make the deal less attractive. Today, with interest rates at an all-time low, it is difficult to imagine many cases where renting is more attractive than purchasing. Income Real Estate is also viable for some. This would include owning small apartment buildings, storage facilities, or shopping centers. This does, however, involve time commitments, just like running any other business, but the income levels can be very positive if you have selected your property carefully.

Bonds represent money loaned to companies or governments at interest. This is a fairly secure way to make money, as long as you loan to secure companies or governments. However a K-Mart bond, or a Government of Zimbabwe bond would obviously not be a wise choice today. Bond-rating institutions like of severe recession or depression and falling interest rates. However, when interest rates are rising, older bonds issued at lower interest rates can actually lose value precipitiously. Thus, in this age of fast-moving interest rates, bond prices tend to fluctuate much more widely than in the past, and their reputation as a perfect investment for widows and orphans is not longer viable. While they may be useful as part of a broad plan, bonds themselves are sterile. By this I mean that they don’t grow. If a growing portfolio is important to you, bonds may not be useful. As with any other investment type, one must consider the broad implications.

Stocks represent ownership interests in businesses. As with investing in personal businesses, one owns the actual company. However, stocks avoid some of the problems of investing in smaller businesses. Liquidity is not a significant problem here, since one can sell shares whenever necessary. Moreover, one needn’t worry about making a part-time commitment to running the company, as corporate management is already in place. However, one must always monitor management to be sure they are working in the best interests of shareholders. Normally, one can depend upon the media and help in this monitoring process, but even this method fails occasionally. Still, despite this problem, stocks are often the ideal investment for most people.

Mutual Funds are simply baskets of stocks, bonds, or other investments, held jointly with other fund shareholders. They help small investors diversify their holdings. (Diversification vs. Concentration – one can either choose to spread their money among a broad variety of investments or concentrate in one or two. Generally concentration is much more risky. )

Derivatives make up a broad category of vehicles that are ‘derived’ from other investments. This may include options, futures, or swaps. Options, for example, are considered derivatives because they are based upon the performance of a company stock. If the stock goes up, or down, the option may be worth more or less. Derivatives are sometimes useful for larger account management, but generally provide a more intense outcome. Thus if shares of a company go up a small amount, an option may go up a lot, and vice versa. This use of leverage can make derivatives riskier, and generally not appropriate for small investors.

In much the same way, using debt for investing, such as margin buying, also increases leverage, and therefore increases intensity and risk. We recommend avoiding borrowing for investment purposes except in extreme cases, as the risk makes this option stressful for many.

The choice of assets is only part of the battle. Most importantly, one must select whether to invest for income, growth, or incrementalism.

To reach Scott Pearson for comments or to learn more about his Investment Advisor services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp. , he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U. S.

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