In this blog we are going to talk about some safe and riskier assets that an investor uses to grow their wealth and create yield for their growing portfolio. We will break down the benefits, tax advantages and risk of each asset. Some examples of these assets are CD’s, stocks, mutual funds, bonds, and retirement accounts such as IRA’s, 401K’s, 403b, and pension plans.
An investment vehicle is a product used by investors to gain positive returns. There are many investment vehicles that provide a return however, you must decide which vehicle works for you in your current lifecycle.
Of course, all investments have risk, so make sure you have the right advisor when deciding on what action to take.
The financial industry considers CD’s, TIPS, and bonds safer than others investment vehicles. However, these investments carry an exceptionally low yield. The riskier investment are stocks, mutual funds, ETF’s, options, annuities, commodities, and collectibles such as art, coins, and cars.
A CD is a Certificate of Deposit. A CD is a promissory note provided by the bank that provides an interest to the investor over a set period of time. The investor is usually lock into a saving account and a guaranteed by the bank and the Federal Deposit Insures Certificate. If the bank goes bankrupt the FDIC guarantees $250,000 for CD’s and $100,000 for each bank account.
The average rate for a 12-month CD was 0.64% as of February 2019. This is extremely low and should only be consider as an investment option unless you feel you need a fixed return over a period of time and do not want to take the risk in other investment vehicles. Please remember, that our government might not be able to bail everybody out, even with this guarantee. The Federal debit is now at 24.95 Trillion as of 2020.
TIPS are Treasury Inflation-Protection Securities. These are bonds provided by the US Treasury and set up to protect investors from inflation. If you believe inflation is going to be less than 1.75% over the next ten years you might want to buy the normal Treasury Bonds. Just a heads up, TIPS can lose money.
Bonds come in many various forms they are instrument of indebtedness of the bond issuer to the holder. The most common bonds are municipal bonds and corporate bonds. Municipal bonds (short for “minis”) are securities issued by states, cities, counties, and other government entities. These bonds are offered to raise revenue for projects that the cities, county, or state cannot afford. For example, building schools, highways, bridges, and possible sewer system. Municipal bonds and corporate bonds are rated on default levels. These rating range from Aaa2, Aa, A, Baa, BA, B, CA-C. The Aaa2 is the most secure investment and the Caa-C is the least secure investment.
Usually, municipal bonds are extremely safe investment. However, with a pandemic, the government step in to bail out the states with the (CARES Act) which gave reprieve to the bond holders.
The average defaults of Munis is 0.10% over a ten-year period. High Income Municipal Bond has generated a 10-year annualized return of 6.28 percent. Generally, Munis are exempt from federal and state taxes. While the interest income is tax-exempt any capital gains distrusted are taxable to the investor.
A corporate bond is issued by a corporation to raise revenue for ongoing operations, mergers and acquisitions, and other expanding ventures. Corporate bonds are a high yield investment. The pros of a corporate bond are that the yield is predictable with low to medium risk.
However, if the company goes into bankruptcy then the bond holder has the opportunity to receive some money back compare to the shareholder that just own the stock
The cons of a corporate bond are inflation or interest rates rising. Meaning that some other vehicles could go up, but you are stuck with the fix interest rate given by the bond holder.
So, let us dive into the riskier investments and start with stocks. One must first understand that there are difference stock market indexes, exchanges, and broker houses that makes and offers the trades daily. Believe it or not there is over 5000 U.S. indexes that traded stocks. The most popular indexes and exchanges are the Dow Jones (DJI), Nasdaq (IXIC), S&P 500 (INX), New York Stock Exchange (NYSE) and the Wilshire 5000 (W5000FLT) which includes all the U.S. stocks on the market.
Each index is unique, for example the Dow Jones carries the more established companies, what we call blue chip stocks or large cap stocks, such as Disney, Walmart, Johnson & Johnson, Exxon, Bank of America, General Electric, Caterpillar, and other large and well-established companies.
These companies usually offer a dividend for the shareholder. A dividend is the distribution of some of the company’s earnings to the shareholder, usually distributes quarterly. If you reinvest your dividends your portfolio will grow over time even regardless of market corrections. If you would have invested only $100.00 in Coca-Cola in 1919 at the Initial Public Offering (IPO) your investment would be worth 1.1 million dollars today.
The Nasdaq is an auction market where it has an average of 14 market makers compared to the New York Stock Exchange (NYSE) which only has one designated Market Maker per stock which ensures a fair and orderly market in the security. Some examples of Nasdaq stocks are what we call growth stocks. Some of these companies offer dividends and some do not. However, if you would have invested $2,000 in Apple, Netflix, Amazon, Google at IPO, you would be a millionaire today.
Another popular index is the S&P 500 which is made up a mixer of the Dow Jones and the Nasdaq. This index comprises of 505 common stocks issued by 500 large cap companies and traded on the American stock exchanges. Since the S&P has the most popular companies, such as Microsoft, Apple, Amazon, Facebook, Google, Johnson and Johnson, and Berkshire Hathaway, some financial advisories just trade this index instead of a single stock, group of stocks, mutual funds or ETF’s.
To trade stocks, there must be a broker house to make this happen. Some well-established broker houses are Chares Schwab, TD Ameritrade, Interactive Brokers, Fidelity, and others.
When deciding to start trading stocks you can either learn how to trade for yourself or use a financial advisor. I would recommend putting most of your wealth with a good advisor and if you want to trade for yourself, just have a small account unless you specialize in trading.
If you decide to go with a financial advisor what are some of the mistakes that people make when choosing a financial advisor. Some critics say one mistake is, choosing a financial advisor that is your friend. However, this is not always the case. If that advisors specializes in the area you are looking for and knows how to create a well strategize plan, this is not necessarily always a problem.
However, not knowing how a financial advisor gets paid and operates is big problem. Financial advisor operates in two ways, they are comprehensive financial planners or asset management planners. They get paid in many ways. The most common are commission based, fee-based, fee-only, and hourly. Whatever financial advisor you choose please make sure they are certified and fiduciary qualified. The meaning of fiduciary is an individual who is ethically bound to act in another person best interest.
There are several licenses and certifications an advisor can have: CFP, CFA, CPA, and ChFC. The CFP (Certified Financial Planner) is generally considered the gold standard in the industry. Advisors must have several years of experience, take an extensive course, and pass a six-hour exam to become a CFP.
The worse thing to do, is pick the first financial advisor that you meet with out shopping around. Here is a two website when looking for a qualified financial advisor:www.smartasset.com and www.napfa.org.
Most financial advisor, that are smart will usually like to diversify your portfolio by placing your money into either mutual funds or ETF’s. Mutual funds and ETF’s include stocks, bonds, options, futures, currencies, treasures, real estate, and money market securities. Mutual funds seem to have more options however, the benefits of ETF’s are that they have low-cost fees, ease of use, transparency, real time pricing, and easy to find and easy to buy and sell on almost any exchange. ETF’s also give you access to markets, sectors, and securities that are important to you, tax efficient and can defer capital gains before you sell your ETF. ETF’s are more liquid.
Other investment vehicles that generate yield are commodities.
Commodities are raw material products like coffee, copper, rubber, silver, oil, and gold. There are three ways to own commodities. First you can own the physical commodity. Owning gold or silver coins is an example of physical ownership. The second way to buy commodities through future contracts. And the last way is to buy contracts through a broker purchasing ETF or mutual fund. Future contracts are a legal agreement to buy or sell a particular commodity by a specific time in the future. Most future brokers have a minimum deposit as much as $5,000 or $10,000 dollars.
The most traded commodities in the world are oil, soybeans, iron, corn, gold, copper, aluminum, and silver. Commodities like gold and silver are a hedge against a recession or depression.
As the economy goes into an economic downturn or turmoil gold and silver always will increase or go up.Since the 1800, there has been thirty financial crises that have affected the financial markets.
The three most recent are: the Barcelona attacks in 2017, the inflation scare of 2018, and the government shutdown of January 2019. It important to diversify one’s portfolio and have some physical gold or silver in your possession in case of a real severe downturn.
The last Investment vehicle that we are going to discuss is collectibles. Collectibles are items that are worth collecting that can bring value to the collector, over time. Antiques are great example of collectibles. However, the rich focus on cars, fine artwork, and rare coins.
In the web article my Michael Lewis3 the top ten collectibles are fine art, rare coins, thoroughbred horses, jewelry and gems, stamps, Faberge egg, cars, fine wines, Chinese porcelain, and timepieces. The most expense fine artwork is the Wildenstein Collection worth $10 billion dollars. There are over 5000, coin companies. The most expense coin is the 1794 Flowing Hair Silver Dollar from the United States sold at auction over $10 million dollars. China and Saudi Arabia has become a hotbed for stamp collectors according to Barclays. The most expense car sold at auction was a 1952 Ferrari 250 GTO for $48.4 million. Christopher Koch continues to have 23,000 bottles of rare wine worth close to $23.9 million dollars. A collection of 100 pieces from the Tang, Song, Ming, and Qing dynasties (618-1912 CE) was sold in a Sotheby’s Asia auction for $66.9 million. When you hit it big, collectible can be a desirable asset that can be fun to collect. Just remember these collectibles can also go down in value. So, collect what you enjoy and want to hang on too.
So, lets recap, there are many different financial vehicles to grow your wealth and risk that come along with these investments. Knowing when to buy and sell or acquire these vehiclesthroughout your life can depend on how much knowledge you have when approaching a financial advisor. Please remember to make sure your advisor is license and qualified with fiduciary responsibility and not just a friend.
Good luck diversifying your assets and picking a good financial advisor.
For more information on diversifying your assets you can go to www.DiverseInvesting.com or purchase The Road Map to Investing on Amazon.
3)Michael Lewis, “Top 10 Most Valuable Types of Collectibles in the World,” Money Crashers, 2020, https://www.moneycrashers.com/most-valuable-expensive-types-collectibles/.
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