Investing - Empower Your Investment Decisions

Choosing the right type of investment doesn’t have to be difficult or confusing. In a moment, I’ll share a simple analogy that will empower your investment decisions.

If you are like some people, you may find the world of investing complex and hard to understand. You know you want to do something with your money but you don’t feel you have the knowledge to choose the right kind of investment. All too often this can result in getting stuck with an investment you didn’t really want or that doesn’t perform the way you expected.

Understand all investments have risk and that there are many different kinds of risk. Some think that a Certificate of Deposit at a bank if risk-free because it is guaranteed by the government. It is free from the risk of the bank defaulting, but it is NOT free of interest rate risk or the risk of rising prices.

The key to successful investing is to determine the various risks you face and then to select the investments that best protect you from those risks. You will almost always find that you face more than one type of risk.

For instance, on the one hand you may need to keep your money stable so that it can provide you the income you need to live. On the other hand, prices for medications, insurance, food and fuel keep going up each year so you need some way to protect the purchasing power of your income from the long-term effects of rising prices.

Not keeping all of your investment eggs in the same type of basket may be the solution. Having a portion of your money in investments that are stable and designed to produce steady income will help you meet your current needs. Having another portion of your money in investments designed to protect you from rising prices will help meet your future needs. The portion you have in each should depend on the amount you have and your comfort level.

Here’s the simple analogy. In general, all investments fall into one of two basic categories. There are investments where you loan your money to someone and there are investments where you own something. Loan investments are designed to provide a stable source of income but don’t protect you from rising prices. Owned investments, such as mutual funds that invest in stocks, are designed to protect you from rising prices but have a return that fluctuates.

Think of it this way. In all likelihood, you own or are purchasing your home. Why? Why not rent? People buy homes because they know that over time their home will appreciate in value and be worth more than they paid for it. Renting, most people feel, is like putting their money down the drain—you don’t get anything for it in the long run other than the dividend of a place to live.

How much will you make on your home this year? There’s no way of knowing. It depends on interest rates, the economy and the cost of raw materials in your area. Some months and years your home will actually lose money, but that doesn’t mean a home is not a good investment because, generally, real estate will appreciate in value over time.

So here’s the bottom line. For money you plan to use in the next 1-3 years or for that portion that you must have to provide income, it is better to rent your money—to use loan type of investments.

The other portion of your money should be used to buy investments where you own something that will appreciate in value over time.

Of course, not all loan or own investments are created equal. Within each category, there are many choices available, some better than others. And you will want to further diversify within each category. But understanding the basics of loaning versus owning will help you know where to start.

Lastly, recognize that there is no such thing as a perfect investment. Beware of investments that attempt to meet all of your needs in one product. Often, these end up being a jack-of-all-trades but a master of none. You can have better control and flexibility if you look for the best investment for the particular risk you face.

Mr. Voudrie is a Certified Financial Planner and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached at www.guardingyourwealth.com or by calling 1-877-827-1463 .