While it is true that investing your money and taking advantage of compounding interest is one of the smartest moves that you can make financially, unfortunately the average person gets very little in the way of education when it comes to investing. This has led to countless financial mistakes that could easily have been avoided had the person who made them only known some basic information. With that in mind we put together a blog with all of the basics about investing your money. We hope you enjoy it and we believe that using this information will help you to build an excellent portfolio.
1) Statistically and historically speaking, stocks have always outperformed any other type of investment. The simple fact is that stocks have provided close to a 10% return over the long run, which is the highest of any asset class. Bonds are next followed by long term US treasury bonds both of which have averaged a return of about 5%.
2) Financially speaking, stocks can be hazardous especially in the short-term.
3) The riskier and investment is the higher the rate of return that you will receive. Stocks, which are thought to be riskier than bonds, also tend to have a higher rate of return. This explains why long-term bonds also pay more than short-term bonds because the person who invests in long-term bonds will have to wait much longer for their final payoff and the chance that something will cause their value to fall is higher.
4) If we are speaking short-term the price of stocks fluctuates due to many things, including interest rates, investor sentiment and even the weather. On the other hand however, in the long run the most important determiner of stock prices is earnings.
5) It is very difficult to have a ‘bad year’ with bonds. For example, in 1994 the intermediate term treasury securities fell by 1.8% but the next year they rebounded to 14.4%. If you compare that to the 1973 – 74 crash when the Dow Jones industrial average fell 44% and didn’t make its way back to its old level for 10 years you can see that having a bad year for bonds is nothing like a bad year for stocks.
6) When interest rates rise bond prices fall and vice versa. The reason is that bond buyers know that they won’t pay as much for an existing bond with a fixed interest rate than they would on a new bond because interest rates in general have gone up.
7) One of the biggest threats to any long-term investment is inflation. Simply put, inflation has historically taken 3.2% a year away from the value of your money and historically that money has never been put back. Based on this alone you can see why it is important to invest your retirement money where it will earn the highest long-term returns.
8) If there is one thing that is close to a sure bet in investing it is US Treasury Bonds. The fact is that America’s economy has historically been quite strong and also the US has a habit of printing more money to pay off treasury bonds when needed. As a result they are .considered relatively risk free. Keep in mind however that just like with all other kinds of bonds, Treasury Bonds will suffer if interest rates rise.
9) The more diversified your portfolio the safer it is. This may be the most vital bit of information that you can take away from this blog today. While a diversified portfolio may not outperform the market it is much less risky because even if some of your holdings take a dive it is highly unlikely that all of them will and it is also likely that some of them will go high enough to make up the difference.
There you have it; 9 of the best pieces of advice that you could ask for when it comes to investing. Just as with anything else that you do in life the more you use the tips in this advice the better you will become an investing. Good luck with all of them and we will see you back here soon with more financial advice and other tips for keeping your financial house in order.