There are three basic classes of assets that are appropriate for holding for the long term but that are not good investments for the short term: stocks, bonds and real estate. Here are 5 things to know before your make investments:
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Risky in the short term: Stocks, bonds and real estate are all risky investments to own in the short run because their asset values change every day; they go down just as often as they go up. Over the long haul, they tend to go up more than they go down, but for time frames shorter than 10 years, it is difficult to predict confidently whether they will have positive returns. (The exception to this general rule pertains to the short-term treasury bonds that will hold their value.)
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Holding these assets directly is inefficient for small investors: If your investment portfolio is smaller than $100,000 it is unnecessarily risky for you to hold these assets directly. Instead of buying individual stocks, bonds and real estate investments you can buy mutual funds and ETFs. When you buy an individual investment, you risk losing all of your money in that investment. You can protect yourself by buying lots of investments in many assets. If you are a small investor, that can be inefficient. If you buy in managed funds, like mutual funds and ETFs, you get the benefit of a professional manager, diversified portfolios and lower risk.
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Expenses are key: If you are investing for the long term, be particularly careful about the fees and expenses you are paying. Even small fees can eat away the returns you get on small investments. See "no load" mutual funds or commission-free ETFs where you can get in without paying a fee to the fund manager or a commission to your broker. Also be sure to choose funds with low expense ratios. To learn more about these fees, read this article here on FamilyShare.
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Real estate is risky, too. Some people, despite the real estate debacle of 2008 - 2010, still think of real estate as a safe investment because you can see it and touch it. That does make real estate safer. When you use debt to buy real estate, however, that makes it riskier than stocks or bonds because you can lose more than you invest. If you buy a duplex with a $20,000 down payment and the value of the property declines by $30,000 and you are forced to sell, you may have to pay $10,000 more just to get out of the property. That can't happen with unlevered investments in stocks and bonds.
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Your first investment should be your home: Before you focus on making other investments, buy a home. Unless you anticipate a move in the near future, you can begin building equity, financial stability and a healthy family by buying a home. Your home is not the best financial investment you can make, but it likely is the best investment you can make for your family.
Follow the tips above for wise and safe long-term investing. For college savings, you can read more here at FamilyHow. For short-term objectives, like saving for a car or a vacation, you can simply keep your savings in the bank where they'll be safe from price fluctuations. Whatever you do, keep saving!
This article was originally published on FamilyShare.com. Check out these other related articles: Don't scatter investments all around town, How do I choose investments for my child's college fund? and Investment tips for 'nervous nellies'.
