Reader Question - Where to Put Your Money Now

I wanted to discuss a topic some investingdecoded readers have been asking lately. The question to where to put your money now is something that's more ambiguous than ever - there's just so much uncertainty out there that it's hard to say where the market will be in 1 month, let alone 1 year. However, there are some basic principles that I feel that everyone should use when investing their money. Just because there's more uncertainty doesn't have to mean there's more complication. Following some basic rules can ensure that you're not making common mistakes that many investors make.

Always keep your outlook in mind

Whether you're a recent college graduate who has just started a new job, or a experienced professional approaching retirement, your investing strategy should always correlate to your outlook. Every investor needs to understand his/her risk profile and tolerance before buying a single stock - if you're investing your nestegg and may need the money in a relatively short timeframe (e.g. retirement is a couple of years away), you should make sure that you don't invest in areas where there's a great deal of short term volatility. On the other hand, if you're investing some of your savings and will likely not need the money soon, you're probably better off investing in something with a higher risk profile but with greater potential rewards.

Do Your Homework

Once you've established your outlook, take some time to research what you're investing in. To a certain extent, investing is always a form of gambling. But doing proper research can greatly change the odds into your favor. In future posts, I will write more about how I do my research. But for now, I'd like to say make sure you understand what you're investing in. Several hours per stock before buying it is a minimum. This includes researching analyst reports, historical events, and annual reports. With this information, you should develop a risk/reward profile and make sure it fits with your outlook.

Have an Exit Strategy

A common mistake that even I sometimes make is not having a well-defined exit strategy. Before even buying a stock you should have a good idea of when you want to sell it. Even I make this mistake often. Sometimes I just fall in love with stocks and hold them longer than I should. It's important to have the discipline to come up with an exit strategy and hold to it. You may lose some upside...but you'll lose a lot less sleep.


Those are three basic principles that I think everyone should follow. They are a little vague right now, but I'll try to elaborate further in future posts.

The next natural question that comes up is where to invest. You may have established your investment outlook and the levels of risk you can tolerate, but where can you invest and what are the risk/reward profiles like in those investments? Here are a few general investments and associated profiles:


1. Stocks - The most commonly known investment is equities - better known as stocks. These are easy to get in and out of, have a good potential return, and, for people like me, are a lot of fun.

• Pros - Near liquid investment (easily sold in case you need the cash, often in 48 hours). Potentially high return. Usually available on well-centralized markets so they're easy to buy and sell
• Cons - Usually a fairly risky investment - can easily go to 0. Stock holders are usually the last to get any money if the company declares bankruptcy. A little more difficult to find good deals since the market is so liquid. It's much harder to find good stocks than to actually buy any stocks, often resulting in mistakes among investors

2. Money Market - The most common version of a money market account is your savings account. It's a place where you put your money and expect to be able to easily access it later.

• Pros - Safe investments that are still liquid. Usually offer a return (instead of just holding the money).
  
• Cons - Returns are generally very low compared to the potential returns in the stock market or other areas.
  

3. Bonds - A slightly less common investment vehicle for small time investors like me, bonds are essentially buying debt for either the government of corporations. Bonds can be a good compromise investment between stocks and money market accounts.

• Pros - Offer a better return than money market with less risk than stocks. Bond holders have earlier claims to money than equity holders when a company goes bankrupt. Usually offer a fixed rate return
• Cons - Somewhat difficult for individual investors to directly buy bonds.
  

4. Real Estate - Pretty self-explanatory. Buy land, house, condo, etc and sell it later or rent it out.

• Pros - Historically a very well yielding investment when held for the long term (yeah, might be hard to believe right now, but it's true). Strong asset since you're buying a physical piece of property (in case you want to use it as collateral for other purchases)
• Cons - Usually high initial cost (down payment, etc.). Usually need a long time before investment returns are positive. Not easy to sell if you need the cash.
  

5. Options - Similar to futures, options are a good way to leverage your money to make more. You can buy/sell options for pretty much anything, but it's most commonly done for company stock

• Pros - Easy way to multiply gains substantially
• Cons - Very risky since the Options themselves don't have any inherent value (they're just contracts that eventually become worthless). Usually very volatile. Can be very complex.

6. Mutual Funds/ETF's - Instead of buying a specific stock/bond etc., it's common for investors to buy baskets of various types of investments. Depending on the type of basket, investors usually buy a Mutual Fund or ETF.

• Pros - Easy way to diversify your investments and reduce downward pressure due to volatility. Easily available and, although not as liquid as stocks, still easily accessible.
• Cons - Management fees take a bite out of principle whether you make money or not (usually 1-2%). Diligence required (at least the same as stock research) before buying).

7. CD - Certified Deposits, usually available at your banks, is similar to a money market, but not as easily accessible. You basically guarantee the bank that you'll keep your money there for a certain amount of time, and, in turn, the bank guarantees you a higher rate of return. The longer you promise to keep it there, the more return they will give you.

• Pros - Safe investment that has better returns than regular money market accounts.
• Cons - Money is locked away and inaccessible (without penalties) for a period of time.
  

The above are a few different examples of how you can invest your money. Most asset managers will tell you that you need a combination of them to be properly invested. Depending on you outlook, you should have more or less of some or all of those categories in your portfolio. Let me know if you need help allocating yours and we can chat!

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.