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Sound tips for where to get the best return on investments
When Google launched its initial public offering, shares debuted at $85. Oh, to have been one of those lucky first investors. Had that been you, you’d now own stock valued at more than $1,000 per share—earnings of 1,200 percent.
Buying that stock then would have been a great idea (had you been able to get your hands on it). Trouble is, for the average investor there are no sure bets. The market is temperamental. What’s a sure thing today (I’m talking about you, gold) is a market stepchild the next. So how can you make investments that will get the most out of your money? Here are some dos and don’ts.
Don't invest using a rear-view mirror
You’re shopping for the new hot investment and see a company whose stock price soared last year. Wow! That must mean they’re going to keep on growing and growing, right? Not so fast, says Certified Financial Planner (CFP) Frank Jaffe of Access Wealth Planning in Roseland, New Jersey.
“The most common mistake people make is investing with a rear-view mirror,” says Jaffe. They get into the market too late, after a stock has peaked. “Past performance can be deceptive and misleading.”
Instead, investors need to work not with predictions but with probabilities. What is the probability that a company’s stock will continue to rise? What market conditions exist to foster more growth? If the chances of the company sustaining that growth are limited, so should your interest in purchasing it.
“Typically the public does not invest until they feel a very strong trend is in place that gives them a sense of confidence,” Jaffe says. “That often is a misplaced
Do own your own home
The recent implosion of the real estate market left many wondering if real estate was still a worthwhile investment. Should you rent instead? No, says Jeremy
Kisner, CFP, author of A Good Financial Advisor Will Tell You and president of Surevest Wealth Management in Phoenix, Arizona. Instead, stop thinking of your
home as a place you’ll live for a few years and then sell at a profit and instead consider it a long-term investment strategy.
“If you’re going to be in one place for under five years, then I can see renting,” says Kisner. “But if you’re going to be there for more than five years, you really
Even if your home were to lose equity over time, your mortgage payment goes toward principal on a home that could, once paid off, reduce your income needs during retirement. Plus you get tax benefits when you own that you don’t get as a renter. “Owning your home in terms of long-term wealth accumulation is critical,” Kisner says.
Don't confuse variety with diversification
Financial planners are fond of telling clients they need to be diversified. But that doesn’t just mean you have to own a bunch of different products. “It’s really about owning different things that behave differently,” says Kisner. “Historically, you diversify with both stocks and bonds, because when stocks went down, bonds held
up pretty well.”
Cash-value life insurance is another diversifier, says Kisner, as is real estate. Also, consider alternative asset classes, a creative way of investing in things such as hedge funds, commodities, and collectibles such as exotic cars and rare wines, as a way to balance out the risk in your portfolio.
Do leave stocks to the experts
If you’re an individual investor managing your own IRA or 401(k), stick to what’s safe, says Jaffe. That includes mutual funds and exchange traded funds (ETFs). Leave the individual stocks to the experts.
“If you don’t know what you’re doing, there’s a higher risk with buying individual stocks,” says Jaffe. “They’re more likely to make bad decisions because, with individual stock, people tend to want to buy it when it goes up and sell it when it goes down. An individual stock is going to go up and down more than a fund and
so people will tend to make worse decisions with individual stocks.”
Don't wait for a stable market
Have you ever uttered these words? “I don’t want to invest now. The market seems so uncertain. I’ll wait until things settle down.” If so, your investing philosophy is based on a fallacy: “The world is never going to be certain,” says Jafee. “It’s always going to be unknown. It only looks clear in retrospect.”
Instead of staying out of the market when it seems to be in flux, the better answer is to diversify your investments and manage your risk. The amount of risk you take on depends on your age, the number of years you are from retirement and how much you’ll need to retire.
Do think long-term
Once you invest in a stock, bond or mutual fund, sit on your hands. You can look at their numbers regularly, but don’t let that rile you. Remember that the most
successful investors aren’t out to make a quick buck. They’re in it to see value increase over the long term.
“Nobody can predict short-term movement successfully,” says Jaffe “A big part of investing is just sitting and doing nothing for long amounts of time. As human
beings we want to do something. But most of the time doing nothing is the thing to do. Remember the saying, ‘don’t confuse activity for progress.’”
So when managing your investments, be patient. Diversify your assets as well as your risk. And seek out an expert’s help when you need it. All of these should help you build a solid, not to mention sizable, nest egg.
Cynthia Ramnarace is an independent journalist based in Rockaway Beach, N.Y. She specializes in personal finance, health and older adult issues. Find out more at cynthiaramnarace.com.