Whatever amount of money that you want to keep intact for a specific purpose, safety of principle will be increasingly vital during an economic downturn. You may want to save your home mortgage, protect your children’s education, or establish a special emergency fund in the event of illness.
The investments you make for this purpose have a low yield. This means the percentage of profit on the principle will grow in value relatively slowly. In reality, it is next to impossible to lose the principle with government securities, CDs and strong corporate bonds in insured institutions.
But, while those securities with a fixed interest return with a constant number of dollars, the purchasing power of those investments, when liquidated, decreases in times of inflation. The results are, as prices go up, dollars buy less and less.
In many instances, this creates increased interest rates which may counteract inflation. Whether you are lending your money to others, or you actually own all or part in an investment, make sure you put safety of principle and income return at the top of your list.
Although the 2008 Great Recession delivered a heavy blow to investors, confidence slowly made its way back into the markets. Before you think about reinvesting, first decide how much money you are willing to risk. You might be able to save $2,500 a year.
To anyone who is new to investing, I strongly suggest you consider the principle of diversification. This simply is the art of investing portions of your money in different things so that, if one of them goes south and bottoms out, you will not lose the entire portfolio of wealth. This is also a good way to reduce your risk.
Overlooked Currency Speculation
Speculation in the rise and fall of currency values provides no income from dividends or interest payments. You are hoping for capital gains, either from the increase or decrease in the exchange rate, and you should be prepared to take substantial risks.
Economic and political factors affect the value of foreign currency. A thorough knowledge of those factors is vital to maximizing your gain or loss. Gains made from currency speculation are taxed as ordinary income.
However, you must also give careful thought to how widely you wish to diversify what proportion of your funds you want to dedicate to various investments. The real reason this should be a concern is that if you divide your money into smaller amounts, you reduce the number of investment alternatives available for each portion of your portfolio.
For example, let’s say you set a limit of $1,000 for any particular investment; you restrict your choice of bonds, CDs, stocks worth $10 a share or less. And yes, since stocks are usually traded in round lots of 100 shares, gold coins, and a couple of other instruments are available for consideration.
Another example–you increase your investment to $5,000, you can also consider small real estate properties, such as rental houses and duplexes, and stocks up to $50 a share.
With a $10,000 limit per investment, you can include on your list of possibilities small commercial real estate properties, such as small apartment buildings, T-Bills, and stocks worth $100 a share or less.
Market Risk vs. Investor Psychology
Market risk is the uncertainty of future prices of an investment due to changed investor attitudes or other influences. Knowledge of investor psychology plays an important role in determining security prices. These attitudes toward particular markets are commonly reflected in such phenomenon as a soaring or plunging Dow Jones Industrial Average.
Additionally, government bonds, high-grade corporate bonds and securities with low financial risk are less vulnerable to investor whims than real estate or common stock. Typically, the better an investment withstands shifts in investor psychology, the lower the financial risk on it.
The good thing is the larger amount you are willing to commit to any one investment, the broader the range of choices open to you. But, keep in mind too that the greater amount you commit as an investor, the more your whole financial standing will be affected by the success or failure of your invested ventures.