Your Questions About How To Invest Money

Ken asks…

How should I invest my money?

I’ll be making around $1000 a month as a teaching assistant for the next year or 2. After taking out money for rent, food, and other expenses I hope to put away and not touch at least $300-400/month, maybe more if possible. I have a checking account and no savings, so I’m basically starting from scratch. I would like to save as much as possible during my schooling so I have plenty when I get out. What’s the best way to invest in order to maximize my money?

John answers:

You should set aside some money first in a savings account so that if you need it you won’t be forced to take it out of the stock market at a bad time or take a penalty on a CD.

After you have a few thousand dollars in a savings account, then you should invest in your 401k or 403b if you have one. Sometimes the employer will match a certain percentage of what you put in, so that will give you the best return. But find out how much your employer will match and don’t put in any more than that. For example, they might match 50% of what you put it up to 6% of your paycheck. So put in 6% of your paycheck and no more than that.

After that, you could consider an IRA (you can only put in a few thousand a year) but that is tax exempt. In an IRA, you can invest in ETFs, and other stock indices, bonds, etc.

After you have maximizes your contributions to those, then you can invest in stocks and bonds and stuff or CDs (however, you shouldn’t invest in CDs now because the dividends of some stocks are higher than CDs) I would not touch CDs until they’re at least 3 or 4 percent.

Also, don’t get scared if your stocks go down – if they have a good dividend, just focus on that. They will most likely bounce back soon anyway.

Some I suggest: GLD, GGN, BPT, and some Vanguard or Fidelity indices like the S&P 500, stuff like that.

Mary asks…

A good way to invest money?

I’m a student and I would like to invest my money. I thought perhaps a savings account like ing direct with good interest rates. But perhaps you guys can help me on making my money sit on a profitable investment. Maybe 2 grand. any ideas what I could do with that amount? Thanks.

John answers:

To Start Investing
It takes a long time to learn the stock market and it would help if you read some books and information online. Before you start investing in the market the first thing you need to decide is what risk level you want to take. CDs backed up by the government has about 3-4% annual return for the long term with a low risk. Bonds or Bonds Funds has about 5-7% annual return for the long term with a medium risk. Stocks or Stock Mutual Funds has about 8-10% annual return for the long term with a high risk and are more volatile than Bonds. A person could make more than 10% annual return with the right investment. Usually the more risk you take, the more return you will have, but not always. To see the Risk vs Return go to my photo: http://i1142.photobucket.com/albums/n620/Chief-1/RiskvsReturn.jpg The stock market is basally made up of stocks and bonds. Investment managers pick a group of stocks to make a mutual fund or a group of bonds to make a bond fund. They even put a mixture of stocks and bonds together and call it a Growth & Income Fund.

1- MUTUAL FUNDS: I like mutual funds because they have a group of stocks (could be around 100+) invested in different sectors, and manage by a professional. Managers have lots of schooling for investing in stocks, around 8 years. So I think managers can pick stocks better than I can. You can make a buy or sell order anytime of the day for mutual funds shares but it will not go in affect until the close of the day. There are lots of different kinds of mutual funds that does not charge any fees to buy it’s shares and they are called Noload Funds. There are also some funds called Load Funds that charge about 5% of your investment. But what I don’t like is the fact that most funds has trading restriction and you may not be able to trade more than 4 times a year. That’s because it makes it hard for the fund to make a good return if there is to much trading in the fund, causing the fund manager to make more buys and sells and keep more cash on hand. Mutual funds are meant for long term investors.
2- STOCKS: Stocks is more volatile than funds unless you spread you money in about ten different sectors and know witch sector will do best. Stock trading restriction is only a few days and that’s something that I like. If you own stocks, you will need to keep up with all the company’s business so you don’t get stuck with a bad stock. That could take a lots of time. I think a person that buys a few stocks is taking more risk hoping to make a bigger return. If that’s the case, look at the leverage ETFs.
3- ETFs (Exchange Traded Funds): ETFs are like a mutual fund but trades like a stock and that is my main reason why I like ETFs. There are some ETFs that represents Index’s. An Index is like S&P or DOW. Index’s operate just like a mutual fund with a group of stocks in deferent sectors, manage by professionals. You can’t buy Index’s because they are not for sell. A company owns them. But you can buy a mutual funds or an ETF that has the same stocks as the Index they represent. There are a lots of different kinds of ETFs for someone to choose from. Some have 1x leverage, some have 2x leverage for aggressive investors, and some has 3x leverage for more aggressive investors. There are some that represent almost every kind of sector.

You can find several good brokers that charge $8.00 and under, per stock trade and no fee on Noload Funds. Most broker websites have good research tools. Some popular broker websites are Fidelity, TD Ameritrade, E-trade, Scottrade and others. I think you need a min. Of $500 (some sites $2,500) to open a broker account and need to be at lease 18 years old. If you not 18, you might could get your Dad to open an account for you.

If you want more info click my picture and read About Me.

Chris asks…

Whats the best way to invest my money?

I am 17 years old and i make about 200+ dollars a week… i am looking to invest my money into something worth while in the long run

John answers:

Invest your money in your gifts and talents: The only sure thing in life if you work in what you’ve been given. Prosperity comes from doing what comes natural. So find your God given talents, and use your money to pursue your dreams and desires. If you do not need the money right now, open an interest bearing savings account, and talk to you local banking institute about how to invest to ensure your money will be there when you need it.

And lastly but very important, don’t forget to tithe.

John asks…

how can i invest my money?

i have $7000 and was wondering if i could some how invest it and how. i want to by a car in 2 years when im 18 and i need some more money, is investing a good way to achieve that? im not to sure if this would be a good idea or not and am looking for some good advice/help/info. thanks.

John answers:

Investing in the right tools can help preserve the value of your money against inflation, but going to stocks with a 2 year wondow is almost as likely to lose you money rather than gain it. If you are not in for 5, the volatility can really hurt you for your goal. You might be the right investor for a CD at a bank or credit union, but shop around. In this interest rate environment, I would not suggest a bond mutual fund because front or back load will hurt you more than the help you would get. Vanguard might offer a no-load fund, but at the management fee rate you will get almost no interest, and will again be better off with the CD. Whatever you do, know your transaction costs and keep them as close to zero as possible.

And get someone to help you find a good used car from someone’s front yard. As a rule of thumb, you lose $3000 value just by driving a new one off the lot, and there is a transaction cost involved in buying used off the lot. If you can get a used car that suits your needs, not necessarily for climbing social status, you will be way ahead of the game for your next goal, which ought to be college or an apprenticeship of some sort.

Ruth asks…

what is the best way to invest money?

if you have just graduated from school and got a job that pays 40,000 per year, what is the best way to invest money? stock market, mutual funds, free tax saving accounts or bonds?

John answers:

Your tax shelters.

Tax shelters are either tax deferred of pre-tax money or no taxes on post tax money. If you imagine investing X pre-tax dollars in a regular taxable account, a tax deferred account and a tax free account for 40 years at a return of 4% per annum and at 22% taxes, you would have the following:

Taxable account

FV = X * ( 1 – 0.22 ) * ( 1 + 0.04 * ( 1 – 0.22 ) )^40
.:
FV = X * 2.67

Tax deferred account taking into account the taxes when you withdraw:

FV = X * ( 1 + 0.04 )^40 * ( 1 – 0.22 )
.:
FV = X * 3.74

Tax free account:

FV = X * ( 1 – 0.22 ) * ( 1 + 0.04 )^40
.:
FV = X * 3.74

As you can see, whatever you invest in a tax shelter will grow much faster than what you invest outside the tax shelters.

Now your company probably offers contributions to a tax deferred plan, in the US this is the 401k, in Canada this would be a RRSP. Often your choice of investments within this plan are limited by your employer or by the third party they have administering the program so there is the chance that the investment choices aren’t the best ones available to you. However the match from your employer is an immediate and guaranteed gain so you should at least match the employer’s match. Then you usually have a tax deferred or tax free shelter which you can set up on your own. In the US, this is the IRA’s, in Canada it’s the TFSA. If you choose a brokerage version of these accounts you can invest in whatever you feel like within the accounts. The contribution limits are quite small so you should try to max out the limits. If you still have disposable income in your budget left to invest, you can invest them back in your employee sponsored program as the contribution limit is much higher and even a less than ideal investment in a tax shelter is better than one outside a tax shelter.

As to what to invest, they usually have a conservative fund, a moderate fund, an aggressive fund, index funds, a bond fund and a targeted fund. A conservative fund is 25% equity ( stocks ) and 75% bonds and rebalanced periodically. A moderate fund is about 50/50. An aggressive fund is 80% or more equity, an index fund is 100% equity, a bond fund is 100% bonds, a balanced fund is when a fund manager adjusts the risk level as a target date approaches according to common views as to how they should be adjusted.

The balancing of the fund effectively buys low and sells high on an algorithmic basis in much the same way that dollar cost averaging buys more low and buys less high. Ben Graham says that the best proportion is 45% equity, 55% bonds and to never go below 25% and never above 80%. Markowitz says the safest is 25% equity which is safer that a 100% bond fund. He also says that 50/50 is the same risk as a 100% bond fund. Markowitz has a tangential method of selecting the optimal proportion where a line drawn from the riskfree rate intersects his efficient frontier ( Markowitz bullet ), this usually works out around the 40% mark. Claude Shannon at MIT represented a stock with a random walk and demonstrated that a 50/50 proportion was ideal for the random walk versus cash, as bonds give a small return, the optimal would be slightly less than 50% equity.

However one of the advice you will hear is to be aggressive when young. Indeed there’s also the crude guideline of taking 100 and subtracting your age to determine the percentage of equity to have. My views on this is that if you commit yourself to depositing a regular portion of your paycheck into your portfolio, you in fact have a bond and you can even calculate the market value of that bond if you have a market rate. You can use your average returns as your market rate or the bond yields of corporate bonds issued by your company as your job can only be as secure as your employer. Therefore, if you take this market value into account, you can then invest more aggressively till your balance point moves into your portfolio. It may still be wise to follow Ben Graham’s advice of no more than 80% equity.

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