Investing Tips

Types of Investments

These are common types of investments that you can invest in, and what kind of returns you can expect from them:

• Bonds, Cash Equivalents, and Gold are very stable for investing but are not very profitable over the long-term. It is important to remember you must beat the inflation and the service fees by your broker in order for these items to be profitable for investment. I would invest very little in these items when I'm young, but invest more in them as I grow older, but even then only to not fall behind inflation. I would not invest in them with the intention of beating the inflation. Gold has been doing well lately as of this writing (2008), but only because the dollar has been doing so badly. Bonds, cash equivalents, and gold are not stocks. Bonds are purchased from governments and private institutions, cash equivalents (jewelry, etc.) and gold are generally traded in the options market. Grains, oil, and other perishables are traded in the futures market.
• Large Cap or Blue Chip stocks (stocks that are a part of mainstream market index) are stable and give consistent profit over the long term. They generally do not produce jolts of profit, however. Expect to slightly beat inflation over the long-term.
• Small Cap stocks are volatile but if invested wisely can produce good profit over the long-term, but can give you a negative return over the short-term. Expect to make decent return on your investments over the long-term but lose money short-term.
• Foreign stocks are expected to do well in the foreseeable near future. A big part of this is because China has been growing rapidly since the integration of capitalism into its then-nonexistent economy in the 90's. Its relatively young yet large stock market is growing rapidly. As of this writing (2008), the volatility of the U.S. market is causing foreign markets to slightly sway, but it should not harm medium term investments. Reassess foreign market situations at least every year, however, as many things are out of your control when it comes to foreign market investing.

Some terms you may see when talking investments that are good to know:

• Mutual Fund is a collection of stocks or other investable items.
• Hedge Fund is same as a Mutual Fund, but is less heavily regulated by the government. This makes Hedge Funds a little more risky, but it can turn up higher profit if the stocks for the Hedge Fund are chosen wisely. The term “Hedge Fund” implies that the stocks chosen for the fund are hedged in such a way to make the fund is more stable; however, this is a historical term that is no longer applicable.
• Index Fund is same as a Mutual Fund but only the stocks that are representative of their sectors are chosen. Usually some market leading investment firm will pick these stocks, and many other firms will follow suit and offer the same set of stocks to their customers.

Tips

• Instead of investing in mutual funds and hedge funds (a collection of stocks hand-picked by your investment firm), consider investing in index funds (a collection of stocks hand-picked by another firm.) Index funds tend to give you a better return on your investment after you take out service fees from your investment firm for hand-picking the mutual fund and hedge fund stocks. Since the stocks for index funds are picked by another firm, the service fees are much lower.
• Buy when the market is down, and sell when the market is up. Most people buy when the market is up and sell when the market is down, but that is the complete opposite of what you should do.
• Do not discount the power of dividends. Many stocks do not look attractive because they do not produce much Capital Gain (increase in the stock value), but they could be a pure gem if they give you high dividends because you can reinvest dividends back into the stocks. Many stocks that are not attractive for their capital gain potentials are more profitable than many other stocks that have high capital gain.
• When the economy is doing badly, companies with negative associations do well. Some examples are companies that produce alcohol, tobacco, and firearms. Casinos and credit card companies also do well when the economy is doing badly. Investing in such companies during bad economic times can turn out to be profitable.

Obviously, these are just general guidelines. Your mileage may vary depending on your situation, your experience, and the market conditions. Standard disclaimers apply here. I do not guarantee your profitability.