In today’s world of electronic trading, hedge funds, and increasingly leveraged investments, it is time for some sound investment advice. Don’t get us wrong. If you can make money trading stocks, investing in hedge funds, or leveraging your investments good for you. However, many lost their retirement savings in the 2008 market crash. Many lost everything because they did not follow sound investment advice and diversify their investments, take a little off the table each time that a stock rose in price, or keep closer track of their investment portfolio. Sound investment advice starts with fundamental analysis not only of individual investments but of one’s financial situation.
Rate of Return on Investment versus Rate of Interest on Debt
A common goal of those who manage large sums of money is to consistently beat the rate of inflation, year after year after year. Consider the miracle of compounded returns. Invest $100 in a stock that grows at an average of ten percent a year. It doubles in value in roughly seven years. Invest in that hypothetical stock when you are twenty-five and when you are sixty years old it will have doubled five times. (2x2x2x2x2=32) The stock purchased for $100 will be worth $3,200. If an investor buys more of the stock each year, reinvests dividends in dividend stocks, and avoids risky investments, he or she can something in the range of $32,000 saved for an early retirement at age 60 with only a $100 a year investment. Invest $1000 a year in our hypothetical stock and you get around $320,000. It is good investment advice to let the value of compounded returns work for you.
Now consider the drag on your investment portfolio of interest payments on debt, especially credit cards. Paying 18% on what you have borrowed? Unless you pay off credit card and other high interest debt first, your rate of return on a great long term investment will be a trifle compared to what you pay out to the credit card company, bank, or other money lender. It is sound investment advice to pay off credit card debt and put six months worth of living expenses in the bank before looking at any other investment.
Over the years inflation tends to raise the value of property. It is sound investment advice to own your own home instead of paying rent so that someone else can benefit from the appreciation of the housing market. This is a case in which paying interest on debt is not so bad because mortgage interest is still tax deductible. Sound investment advice in this case is not to bite off more than you can chew. People who fell for the argument that low interest rates would stay low forever lost their homes when the economy collapsed a few years back. Buy what you can afford and trade up as your income grows. These may not have been the hot investing tips that you thought you would see in an article about sound investment advice but they will serve you well over a lifetime of investing.