Different types of Investment Vehicles

Vehicles in this case refer to the way investors achieve their goals. What is the goal of investors? Growing their capitals, of course. There are ways to do this, both effective and ineffective. Let’s dissect them one by one.

Certificate of Deposit (CD)

This is what people in the old days use to save. It is still a valuable instrument for folks who want to park their money in the short term. CD is a binding agreement between you and the banks whereby you agree to let the bank keep your money for an agreeable period of time. In return, the bank will compensate you with a small amount of money called interest. Once the time is up, you are free to either extend the duration of the CD or claim your original investment plus interest from the bank.

The return on investment for CD for the most part matches the rate of inflation. Perhaps, around 3% or so. Therefore, most of us will not be millionaires investing in CD unless you are earning in excess of $100,000/ year. However, this is the safest instrument that currently exists. The possibility of losing your investment is close to zero.

Bond

Have you ever lent money to your friends? You probably have. They need money to buy a can of soda? A pack of cigarette? As annoying as they can be, your experience will help you more understanding bonds.

Much like your friends, large organizations such as corporations and governments occasionally need to borrow money for various purposes. Instead of going to the bank, these organizations can go to individuals like you and issue bonds in promise of returning the money back in some point of time. Will they pay you back? There is no guarantee. Just like your friend Joe who borrows $5 for a pack of cigarette, corporations sometimes are unable to pay their debts. This situation is called default.

The return for bond varies between 4-10% a year. However, the safest of all is the bond issued by the US Federal Government called Treasury bond. Currently, the yield on a 10 year treasury is 4.42%. This beats inflation in the long run. After 40 years, you will have considerable sum of retirement fund but not quite a millionaire yourself.  Assuming a 5% annual return and putting aside $1,000 aside, your saving will be worth $470,281 in today’s dollars. The possibility of losing money on the original investment is slim but to be a millionaire, we need more return. Perhaps, exchange traded fund will give you the answer. Next, please.

Exchange Traded Fund (ETF)

Whoa! Don’t let the name fools you. It is nothing to be afraid of. It is this simple. You know about the market indices that financial reporters talk about? The like of Dow Jones Industrial Average, S&P 500, Nasdaq 100? Do you sometimes wish for being able to mimic their performance without buying all the stocks that comprise the indices? Well, now you can. For example, by buying a ticker DIA, enables you to mimic the performance of Dow Jones Industrial Average without buying all 30 stocks of DJIA. This saves small investors considerable commission costs.

What is the average return on this ETF? Well, since 1929, the Dow Jones industrial average has returned 10.1%. If you are buying DIA (which is ETF for Dow Jones Industrial Average), then you can expect to give a return of 10.1 % annually. How safe is this? Investors might lose up to 50% in a given year. Therefore, it is not advised to use your rent money to invest in ETF. This is a slow and sure way to get rich. But still, it does not quite make common people like us millionaires at retirement age. How about common stock? Yeah. Let’s cover that. Hope it gives you some answers.

Common Stock

Suppose you have a nice bookstore around the corner offering wide selection of books and magazines. Inside, visitors can browse around the stores and read as long as they care during store opening hours. The store is offering starbucks coffee and espresso for folks who wish to stay throughout the night. The store is packed with people and yet you can hear a soft jazz music echoing throughout the entire store. Wow. This store must be making lots of money, you mused. ‘Wish I could own a business like this some day.’ Well, that day has come. The name of the bookstore happens to be Barnes & Noble Inc. listed on the New York Stock Exchange (NYSE).  You can buy the stock and own a portion of a business without ever having to manage the bookstores yourself! That is good news. You want another one? Here it is. You don’t have to have a million dollars to be able to own that bookstore. With as little as $500, you are ready to go. Isn’t that neat?

Investing in common stock is buying a piece of ownership of a company. If you buy 1 share of Microsoft, you are the owner of the company, albeit less than 0.00001% share.

These days, the goal of institution managers is to beat the market indices by buying prospective common stock. Here at Noviceinvesting.com, we strive to better the return of the average by combining the power of fundamental and technical analysis. How much return can you possibly get? The return of 14% a year is not out of reach if you have the necessary knowledge and patience. This, my friend, is our ticket to be a millionaire for commoners like us. All you need is putting aside $200/ month and the willingness to learn and soon we’ll be on our way.

We are not saying it is easy. No! Nothing is easy. There will never be any free lunches, unless the stinky ones. Investing in common stocks are the riskiest strategies out of the things we have described so far. Investors might lose all of their investments. But if it helps you to reach the goal of retiring as a millionaire, would you do it? Well, the answer lies on your hand now.

Before we cover more in depth about investing in common stocks , here is a few common mistakes that people made. You can skip reading by clicking here.

Common investing pitfall:

1. Investing with debt. You should not invest when you still owe a lot of money in your credit card. Credit card interest can run to as high as 20% while in the long run, investing in the market indices can give a 10.1 % return historically.
2. Not Starting Now. By now, you should have known that compounding works its magic in longer time frame. The sooner you start, the longer time you let compounding do its magic and the larger your savings will be at retirement age.
3. Investing based on stock tips. Stock tips are just that, tips. It is supposed to help you invest but not giving you a shortcut. Doing your own due diligence is an absolute must even when you get stock tips from the so-called professional.
4. Investing for the short-term. The easy access of internet makes it cheaper for small investors to buy stocks online. However, short-term trading is not going to work, no matter how small your commission is. It is extremely hard to predict short-term movement of stocks. Traders come and go and those that stay seldom beat the market in the long run. Furthermore, what do you prefer? Spending a few hours each week and making a 14% return on your investment? Or spending 8 hours a day where the odd of beating the market is slim?  I would prefer to spend just a few hours a week, of course.
5. Investing without knowing technical analysis.  We believe in investing for the long haul. However, it does not mean that we blindly buy any stocks that look undervalued. Supposed a stock A is undervalued at $15. If technical analysis predicts a steeper fall, would you still buy it? Of course not. We would rather buy the stock A at a lower price if all else remains equal. Furthermore, most mutual fund managers are evaluated at a yearly basis or even quarterly. If they are selling the stocks for particular reasons, we would like to buy when they are done selling. Why is that? Think about this. If you like A at $15 and everyone is selling. What is the chance of A going up when you are the only person buying? Very slim, indeed. Now, this does not mean that technical analysis can predict the absolute bottom or top. We are just saying that our investment dollars are way too valuable to lose by buying blindly without knowing who is selling and who is not. That is just too costly.

Phew. We hope that you stick around. We realize that this is a long journey for some people but trust us, this is worth it. If you are not earning $100,000/year and want to be a millionaire by the time you retire, you need to keep the spirit on and hear what we have got to say.

Oh well, let’s move on to analyzing stocks. You can take another break if you wish. This is going to be another long reading. When you are ready, you can click here.

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