Money management is easy, right? All you have to do is save a little bit, invest a little, and everything will turn out alright in the end. It’s unfortunate, but many people take this approach – as vague as it is. They don’t have a real investment or money management plan. They stuff savings into a savings account, and they invest in whatever everyone else is investing in. But, if you care about your money, you’ll spend some time learning how to develop at least some basic money management skills.
Keep In Mind That Stocks Outperform Bonds
As a general rule, stocks always outperform bonds, and every other investment, over the long-term. Sure, there are periods when bonds will outperform stocks, or come very close to outperforming stocks, but the trend has always been that stocks are more profitable.
This makes sense, if you think about it. A share of stock in a company represents part ownership of that company. A bond is a debt instrument. It represents a loan that’s due at some point in the future. Unless a company has bad credit, it’s not going to pay a lot in interest. In that sense, the best bonds on the market will almost never outperform the stock of that same company (over the long-term) because the company’s profits need to outpace what its loan obligations are. If profits don’t exceed debt eventually, the company will go out of business.
Of course, as an investor, you take more risk by investing in the stock of a company. That’s because debtors are always paid off before shareholders are. So, if the company is ever in financial trouble, bondholders will recover more of their money than shareholders.
Stocks Aren’t Always Good Short-Term Investments
Sites like BrokerStance often recommend using online brokers, but be careful when you start investing with them. Many investors, who aren’t used to buying and holding anything, dodge in and out of the market. This can be a fatal mistake if you’re investing in stocks.
Unless you’re familiar with more advanced trading strategies, stocks can (and often are) short-term losers. Be prepared to hold positions for 10, 20, even 30 years. That’s a long time, but this is the true meaning of investing. You hold positions for many years at a time.
Speculators and traders often hold stocks for only a few days, weeks, or even months. Holding a position open for a month is considered a log time for a trader. For an investor, it’s not.
Risky Investments Can Pay More Than Safe Ones
Sometimes, a riskier investment pays off more than a safer one. Blue Chip stocks, or aristocrats on the S&P500 (companies that have made dividend increases for the last 25 or more consecutive years) are generally safe bets.
Junior mining or energy companies, exploration companies, and startups, are all risky businesses that could collapse in any given year. You might invest in a startup company today, only to find out that it’s going bankrupt 3 months from now – you lose everything.
On the other hand, risky companies can sometimes return thousands of percent overnight. This sometimes happens in the energy and precious metals markets, where a junior mining or exploration company finds provable and proven reserves. A larger, more established company then buys them up and starts producing – instant profits of hundreds or even thousands of percent.
Rising Interest Rates Are Bade For Bond Investors
When interest rates go up, bond prices fall. That’s because bonds investors, on the whole, don’t want to pay for an existing bond with a low fixed interest rate of, say, 3 percent, when they know that the fixed rate on a new bond will pay much more.
Likewise, when rates fall, bond prices tend to increase in price for similar reasons. Newer bond issues that have lower interest returns can’t fetch the same price as existing bonds, so those existing bonds with higher interest rates tend to become more valuable.
Realize The Effect Of Inflation
Inflation is the biggest threat to your savings, and your investments – especially if those investments are bonds. While a market crash can wreak havoc on your portfolio, the stock market has always eventually bounced back. However, inflation is a constant force that continually eats away at the value of your savings. It never lets up.
When In Doubt, Index It Out
Index mutual funds often outperform actively managed funds. If you’re new to investing, it’s probably worth looking into one of these funds if only for the fact that it takes a lot of the stress off of you as the investor. It seems surprising that people would bother with actively managed funds, but a common belief is that money managers are capable of applying skill to stock picking and that skill will result in higher performance. Yet, after expenses, these funds tend not to perform as well as lower-expense mutual funds.
Jarryd Harden is passionate about finance. He often writes about money management and smart investments on financial blogs.
