Investing in Fixed-Income Securities (Bonds)
- When you buy fixed income security, you are really lending money to the bond issuer in exchange for interest income.
- You can buy certificates of deposit or money markets, or invest in corporate bonds, tax-free municipal bonds, and U.S. savings bonds.
- They are purchased through a brokerage account.
- Selecting your broker will require you to choose between either a discount or a full-service model.
- You can work with a registered investment advisor or asset management company that operates on a fiduciary basis.
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Investing is about laying out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.
Most of the time, this is best achieved through the acquisition of productive assets.
- Productive assets are investments that internally throw off surplus money from some sort of activity.
- Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details.
- The three most common kinds of investments from productive assets are stocks, bonds, and real estate.
- It means investing in common stock, which is another way to describe business ownership or business equity.
- When you own equity (the value of the shares issued by a company) in a business, you are entitled to a share of the profit or losses generated by that company's operating activity.
- Equities are the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.
- Investing in Privately Held Businesses: These are businesses that have no public market for their shares. They can be a high-risk, high-reward proposition for the entrepreneur.
- Investing in Publicly Traded Businesses: Private businesses sometimes sell part of themselves to outside investors, in a process known as an Initial Public Offering, or IPO. When this happens, anyone can buy shares and become an owner.
If you are the type of person that likes companies that are stable and gush cash flow for owners, you might be drawn to
- blue-chip stocks,
- dividend investing,
- dividend growth investing,
- value investing.
If you prefer a more aggressive portfolio allocation methodology, you might be drawn to investing in the stock of bad companies.
Even a small increase in profitability could lead to a disproportionately large jump in the market price of the stock.
Real estate investing comes down to either developing something and selling it for a profit or owning something and letting others use it in exchange for rent or lease payment.
It can allow someone without a lot of net worth to rapidly accumulate resources, controlling a far larger asset base than he or she could otherwise afford.
Real estate can also be traded like a stock. Usually, this happens through a corporation that qualifies as a real estate investment trust or REIT.
Once you've settled on the asset class you want to own, your next step is to decide how you are going to own it.
If you decide you want a stake in a publicly-traded business, do you want to own the shares outright, or through a pooled structure?
Outright Ownership: You will buy shares of individual companies directly. To do this right requires a certain level of knowledge.
Pooled Ownership: You mix your money with other people and buy ownership in a number of companies through a shared structure or entity. The downside is a near-total loss of control.
Your decision can have a major impact on how your investments are taxed.
Choices include taxable brokerage accounts, Traditional IRAs, Roth IRAs, Simple IRAs, SEP-IRA, and maybe even family limited partnerships.
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Three essentials for successful investing: Invest in things you understand with low fees and minimal taxes.
Taxes can take a massive chunk of your investments' future earnings, so minimize their impact as much as possible. With long-term investments, first max out your 401k, Roth IRA, and SEP-IRA, since they offer a tax benefit either when you deposit or withdraw the money.
- Think Long-Term. It’s very rare for a sudden move in price to mean very much Things will balance out so be patient.
- Always keep a few months expenses around in case something happens and invest the rest.
- Buy What You Believe In. If you do not know or understand what you’re buying, don’t buy it. Invest in something that you personally believe in.
- Do Your Own Research.
- Set It and Forget It.
- Consistently Contribute.
- Be Fearful When Others Are Greedy.When everyone is a winner you should be concerned.
- Be Greedy When Others Are Fearful.The best time to buy is when the world is on fire, not just the typical knee-jerk reaction of the media.
- Find and Remove Frivolous Fees. When the stakes are highest, so are the fees. Even a 1% fee can become significant over the long-term.
- Diversify. If it can fail, it will fail. Plan ahead for failure.
- If you have a 401(k) or another retirement plan at work, it’s very likely the first place you should put your money— especially if your company matches a portion of your contributions.
- A robo-advisor. These services manage your investments for you using computer algorithms and typically costs 0.25% to 0.50% of your account balance per year.
- Target-date mutual funds often hold a mix of stocks and bonds and automatically invest with your estimated retirement year in mind.
- Index funds are like mutual funds on autopilot: Rather than employing a professional manager to build and maintain the fund’s portfolio of investments, index funds track a market index.
- Exchange-traded funds. ETFs operate in similar ways as index funds: The main difference between ETFs and index funds is that rather than carrying a minimum investment, ETFs are traded throughout the day and investors buy them for a share price, which like a stock price, can fluctuate.
- Investment apps like Acorns or Stash.