We all know what we’d do if we won the lottery or had one day left to live or what tattoo we’d get if forced at gunpoint (the Tasmanian devil in a wrestling singlet. Don’t ask).
But what if you had a little money–not the life changing, tell your boss off kind of loot, but a couple of grand that you could really do something with–do you know where you’d invest it?
It’s a given that we’d all want to put it where it makes more money; but to get to that point, it takes a little self assessment about your financial needs, risk tolerances and goals. Otherwise, this fundamental question–and not having an answer for it–can cost you dearly.
Money Can’t Buy Love, But It Can Buy An RV
When my Mom passed away, we received a modest check from the life insurance. After funeral expenses and bills, my sisters and I were left with nearly $7,000 each. Now, granted, it wasn’t enough to retire on, but I decided that I would invest to see if I could change that.
This may or may not have been influenced by the fact that I had recently begun working with numerous financial advisers whose jobs were to give to people in exactly my position money advice–and invariably, the advice was always “invest.”
Got that? Not, “Buy a plasma TV” or “I totally must have a Coach purse!” If you want to grow your money, the only way is to invest.
But, there are just as many styles of investing as there are Coach purses: real estate, collectibles such as coins or stamps, new business ventures and precious metals, for example. These are less liquid securities, or investments that are harder to turn into cold, hard cash.
Given my $7,000 budget, none of these ideas were likely to lead me to my dream of retiring at 30, buying an RV and stopping at every tourist trap North America has to offer (first stop–the Corn Palace in South Dakota).
To get on the road, I needed to consider more liquid kinds of investing: stocks, bonds and mutual funds. In a pinch, these are relatively easy to convert to cash and are the kinds of securities that most people think of when they hear the word “invest.”
The Part Where I Call Mutual Funds “Sexy”
OK, so that still left me with three choices.
As a general rule, the closer you are to needing the money for conventional retirement, the more conservatively you should invest it. That said, as a spry 27-year-old who may or may not have a nipple piercing, I wanted to let it ride. (Yeah… may not. But I’m young yet.)
Bonds are about as conservative as it gets. There’s a reason that grandparents love to give them as gifts.
Bonds are basically loans to the U.S. government. Because the likelihood that you’ll get your money back is really high, the reward, or interest, is pretty low–generally somewhere around 4% to 5%. It varies, but you can make that amount in most savings accounts, so bonds get a big yawn.
Mutual funds are like big baskets of stocks, bonds and other types of (usually) conservative investments. Mutual funds are managed by dudes in suits who are like bouncers: they throw out any security that isn’t performing up to par and replace it with a stock or bond that is sure to “behave.”
A lot of more conservative investors like that kind of protection, but a system like that ensures that no one’s going to get up on the bar and start dancing–in other words, a part that’s not much fun for a young investor’s extra money. Most people invest in mutual funds via their 401(k)s or other retirement accounts through work, so they can have their place, but it’s generally not with speculative funds.
Don’t get me wrong–there are some sexy mutual funds focused on global economies and hot commodities, but by and large, they’re a little slower than most young professionals need outside of retirement plans.
To Market, To Market
So, that leaves the stock market. That seems easy enough. “It’s like a supermarket. I’ll just go shopping and pick out what I like.”
No. Bad. WRONG.
Just like any other major purchase, you need to do your research. Just because you love your Vonage wireless and think the service is awesome and the company is going to make a gazillion bucks does not mean you should run out and buy it.
Vonage’s value has dropped more than 50% since the beginning of 2007. The company is hemorrhaging money and ticking off investors left and right. The same may go for your favorite clothing, food, car, software or computer company.
If you don’t want to do the legwork, there are plenty of people on TV who love doing it for you. I can’t endorse any particular advisor but one guy whose name rhymes with “Slim Ramer” and is on CNBC is actually fairly entertaining to watch.
If you’d like more in-depth information, an unbiased non-profit organization, The American Association of Individual Investors (AAII), is a great place to start. A scant $29 membership fee will buy you access to all of the association’s objective advice for personal investing.
You can even subscribe to a financial advisory service where someone will tell you on a daily, weekly or monthly basis which stocks to buy and sell. These services can run anywhere from $50 a year to $5,000 annually, so just be sure the subscription cost doesn’t eat into your funds too much–most experts agree that financial advice shouldn’t cost more than 2% of your total available funds to start with.
If you have no idea where to begin looking for such a service (though doing an Internet search for “stock advisor” will generate a bunch of hits for you), there’s a great watch dog in The Hulbert Financial Advisor, which independently tracks most of the people out there who scream, “Hey! Pay me a lot to tell you how to invest your money!”
You can see each advisor’s latest returns in bi-annual issues of The Hulbert Financial Advisor, so you know whose track record is tops and who has flopped. (Although, like sports teams, financial advisors’ past performance is in no way indicative of future profit, so just keep that in mind, okay kids?)
To RV or Not To RV: That Is the Question
So, you may be wondering how I fared with my $7,000. I knew you were going to ask that. Well, I lost about half of the money, thanks to a lot of novice mistakes.
I tried too many strategies and listened to too many people instead of sticking with just one. You’ll go crazy trying to follow conflicting advice. I also entered into the market at a really bad time and, thanks to my impatience, I also left at a very bad time. But, those stories and lessons are for another time.
For now, take some time to reflect on how you would feel most comfortable investing your money if given the opportunity. And also, what time of year you’d visit the Corn Palace. I’m thinking the spring, provided I hit my retirement savings goal by then.
Come to think of it, it’s probably going to be closer to the fall. You know, I hear winter is actually a lovely time of year to visit South Dakota.
Valerie March currently works for a financial publisher and has accumulated nearly three weeks of vacation. She is gladly accepting ideas for her North American exploration of the best (worst) tourist traps. If you have a suggested stop, leave it in the comments or contact her at www.valeriemarch.com.