Prioritize Yourself Over Debt Collectors
Instead of waiting to start saving and investing once you’ve cleared your debt, it’s crucial to begin immediately. The compounding effect of your earnings can unlock the door to financial independence. Conversely, if debt compounds, you’ll find yourself in a debt prison. The key to climbing out of debt lies in growing your assets and income.
Real Assets Over Paper Assets
We live in a challenging economic climate threatened by credit and inflation risk. Against this backdrop, tangible assets that yield positive cash flows are preferred. The buying power of your paper money will diminish in the years of escalating inflation. On the other hand, your home, income-generating property, or even a vintage car can appreciate in value. In current market conditions, many assets are available at attractive prices.
The Safest Option
Contrary to general assumption, bonds do not offer safety, especially in an environment fraught with credit and inflation risk. Don’t be lured by the promise of slightly higher returns while ignoring a significant increment in risk. It’s critical to understand the costs associated with any investment and assess meticulously credit risk, interest rate risk, and default risk. Banks and credit card companies might promise attractive returns on so-called “savings” accounts. Always look out for FDIC-insured accounts to ensure the safety of your savings.
Stocks and the Modern Portfolio Theory
As a rule of thumb, equal your age with the percentage of your investments kept safe. Diversify the rest by size, style, and sectors bound to grow. Avoid putting your money in companies receiving bailouts.
Bonds: Beware of Credit Risk and Interest Rate Risk
In times when interest rates are extremely low and the Federal Reserve has communicated its intent to keep it that way until mid-2013, bondholders feel safe. However, the reality is that credit risk is heightened, along with the incidence of defaults and downgrades. Worst-case situation, you stand to lose a large chunk of your principal in bankruptcy deliberations and your investment becomes illiquid for the duration of the bond.
Treasury Bills
The US possesses the power to print its own money, which on the face of it sounds reassuring. However, the downside is that excessive printing reduces the value of your dollar. While it is unlikely that the US will go bankrupt, it’s highly probable that inflation will erode the purchasing power of your savings over time.
Foreign Currency
The world of foreign currency trading, promising high returns, is fraught with risk. A large proportion of seasoned investors steer clear of this area. Moreover, invest with caution in software claiming guaranteed success rates, especially when they’re highlighted in poorly-written promotional content.
Real Estate
With high credit standards and reduced loan accessibility, investing in real estate may seem challenging. However, considering low-interest rates and property prices comparable to those around 2002, real estate might be an appealing investment opportunity. Remember to perform thorough analysis beforehand.
International Investing
Diversifying your investment across international markets can bear fruitful returns. However, geopolitical risks such as a change in government threatening nationalization of businesses can be risky. Acknowledge these risks fully and only then decide on the level of exposure that will suit your investment strategy.
Annual Rebalancing
Rebalancing your portfolio 1-3 times a year greatly enhances your investment performance. If this practice was followed, one would have seen an upside at the peak of NASDAQ in 2000, returns from real estate in 2005, double returns from Australian and Latin American funds in 2009, and lesser than 20% losses during the Great Recession.
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