What do you do with your hard-earned money?
As you look for long term investment opportunities in todays economy, you have several choices Let's examine them.
Stocks
When you buy stocks you are buying ownership in a company. This means you have all the risks associated with owning a company, but your control is limited unless you own over 50% of the shares. Generally, you buy stocks for long term appreciation. Over the last several decades, the long term return of the market has been a little over 9% - and the last decade was much worse! The dividends are usually very low - especially for stocks that have any growth potential, - so they make a poor investment choice after you have retired, because they generate very small income. If the market crashes right before you decide to retire, you lose much of your nest egg,
You can use leverage when investing in stocks by buying on margin or using options. These options are not recommended to the novice investor. Without the right education they can be very risky, and even then it requires a lot of experience and the right personality.
If you buy stocks in a 401k, IRA or annuity, you may be able to defer the taxes on the gain. This is a very limited tax advantage, and as you will see in future articles, may be detrimental.
Bonds
Bonds are essentially a loan to governments or corporations. They are usually bought for the income stream they provide, but they can go up or down in values as interest rates change. The leverage, control and tax advantages are similar to stocks. Bonds do best when interest rates decline. With interest rates at all time lows, bonds do not look attractive right now.
Precious Metals (Gold)
There is a lot of talk right now encouraging the purchase of gold. The two main reasons are due to the possibility of inflation and economic collapse. Inflation is a real concern, almost every government in the world is printing money like it was going out of style. If you believe that we are close to economic collapse, then you should be stockpiling food and planting a large garden. Gold would be a secondary investment.
Gold can be a good short term investment if you time the market correctly. Gold is mosty used as a long term hedge on inflation. When used as such, however, it really isn't an investment. If you buy gold ahead of a long stretch of inflation, you may get more dollars for your gold, but you don't increase your buying power. Gold provides no income and no tax advantage. You have no control over its increase or decrease in value.
Real Estate
The chart below compares real estate to these other investments. A real estate investment provides both appreciation in the long term and cash flow in the short term. This cash flow reduces the risk of the investment, because if the overall housing market drops in values, the rent continue giving you an income stream. (Of course it is important that you buy correctly). Real estate gives you more leverage than any of these investments, usually up to 80% or more of the value, giving you even grater returns. Buying real estate gives you more tax advantages than any of these other investments. You have more control over this investment than any other. You also can take advantage of market inefficiencies, which don't exist in these other investments. You also have a hedge against inflation, but since you are leveraged, your buying power actually increases with inflation.
Now is a great time to buy real estate. Prices are depressed, interest rates are low and rents are high.
