The Best Way To Invest Money

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
- Warren Buffett

The best way to invest money is the one which you want to learn the most about. Some people want to learn about stocks, currencies, real estate and bonds. Other people are afraid of market swings and would rather accept a lower return like with a certificate of deposit (CD) and go do something else besides learn about investing money.

Think about what you are most interested in. In the words of Robert Kiyosaki, “to make a lot of money investing, you must first invest a lot of time.” What would you like to spend your time learning about? If you don’t want to spend your time learning about investing, are you willing to settle for a lower return? Sometimes the best way to invest money is in plain old certificates of deposit (CDs). Currently, CDs return anywhere from 3.5%-4.5%.

The basic premise of a CD is that your money earns a guaranteed return over a specific period of time as long as you leave the money in the account. If your bank is FDIC insured, the CDs there are FDIC insured, so if the bank goes belly-up, your money is still safe under the current limit of $250,000 per depositor. CDs are good if your time period is rather short (1-2 years) and you would just have the money sitting in a savings account anyway.

If you can tolerate more volatility, stocks are a good choice. Stocks represent equity in a company, so when you buy a stock, you are essentially buying a tiny piece of a company. It is possible to make money through stock dividends or appreciation of the stock price. If the price of the stock goes down, your investment is worth less, if it goes up, your investment is worth more. If the stock pays dividends, these are paid at intervals throughout a year. If you chose to reinvest your dividends, the value of your investment will grow this way. If you want the dividends paid in cash, this is another option.

Lots of people invest in mutual funds. These are pools of investor funds managed by a manager or tied to an index like the S&P 500. Like all other investments, mutual funds can be profitable or unprofitable, depending on the mutual fund manager and the length of time invested.

It is possible to buy a mutual fund through a brokerage firm and invest that way. Mutual funds can hold stocks, bonds, real estate, and other mutual funds among their holdings. There are thousands of mutual funds and each has their own method of investment, so it is important to read the mutual fund prospectus to determine what the fund invests in, what fees are charged, and what kind of tax liabilities will be incurred through the fund.

Exchange Traded Funds (ETFs) are very similar to mutual funds in that they are a pool of investor’s funds used to invest in many different vehicles. Contrary to mutual funds, ETFs trade throughout the day like stocks and charge less fees than mutual funds.

 

Another way to invest money is through bonds. Bonds are debt that is repaid with interest, called the coupon rate of the bond, which is a percentage of the principal. Coupon rates can range anywhere from zero, (called zero coupons) to in the double digit percentages for more risky corporate debt. There are federal bonds, municipal bonds and corporate bonds.

Treasury bonds are the safest, released by the Us government. The interest rates are lower than municipal or corporate bonds, but these are the safest types. Blue chip companies with long, established track records are also considered very safe bonds. Junk bonds are the most risky, these are bonds rated “BB” and lower because of their higher risk.

Investment real estate is another way to invest money, but it is a lot more time intensive than more passive investments like stocks or bonds. The time required to learn about the local market, look for properties, put them under contract and buy is large, but the payoffs can be huge. Once the property is bought and sold or bought and rented out, the time requirement is less. Investing in real estate could almost qualify as a part time job, so if you don’t have the time to learn about the local market where you are considering buying, I would avoid real estate. Since I like to make the time to devote to it, I really like real estate. Also, since a building is a great business system, it can definitely be the best way to invest money.

Foreign Exchange (forex) is yet another way to invest. When you trade forex, you are trading currencies against each other. You can bet that the British pound will rise or fall against the dollar, or on the moves of a whole bunch of different currency relationships. The forex market is larger than the stock market, it encompasses a multi-trillion dollar worldwide market. It is possible to trade forex nearly 24 hours a day, but the market doesn’t necessarily move well all 24 hours. I wouldn’t start investing for the first time ever with forex, but it is fascinating to learn about the way that currencies move and how to take advantage of the moves.

Trading commodity futures are another vehicle. Investing in commodities involves opening an account at a futures broker and trading contracts of things like wheat, corn and sugar. A nice thing about commodities is the ability to go short, i.e., bet that the commodity will go down, without needing an uptick. Commodity contracts end at a specific date, so they require more active trading than stocks or bonds. It is also possible to trade other types of futures, like currency futures, S&P futures or precious metals.

Ultimately, the best way to invest money is the one that you want to learn the most about. If you pick something and specialize in it, you’ll always know more than if you spread yourself thinner by choosing a lot of different strategies that you know little about.

You must determine the best way to invest money for you, and stick with that. No matter which way you chose to invest your money, take the time to read and learn about it.

If you don’t want to spend a lot of time learning about investing, I would recommend choosing a mutual fund that tracks the total market, and buying a set dollar amount of the mutual fund at predetermined intervals (dollar cost averaging). Then hold the money until you need it, preferably 5-10 years in the future to ride out possible market swings. In my opinion, this method falls very short, but everything, including investment returns, comes at a price.

I hope you enjoyed the best way to invest money.

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