Investment
Section I / Section II / Section III

Investments are assets purchased to generate income or appreciate in value. Included are your formal education or training, personal residence, a house that you repair/remodel and sell, stocks, bonds, real estate, collectibles, art, coins, stamps, beanie babies, etc. They provide income and give economic security as your "money is working for you" and you are not just working for money. You work hard for your money. Make sure it works hard for you or your favorite charity.

Myths are:

It takes a lot of money to start investing.

I'm too young to worry about investing.

The stock market is too risky. (Some people have lost money in the stock market.)

Diversification of Investments

• Diversify for increased economic security, reduction of risk, and greater return.
  
  
• Diversify risk by having several different investments to counteract the risks of business risk and failure, management risk, financial downturns, market changes, change of interest rates, and purchasing power changes due to inflation (prices change in general). The impact of purchasing power risk is shown in the table illustrated below.
  
  
• Diversify by using mutual funds, or by holding more than one investment in an asset class, or by having investments in several asset classes.
  
  
• Diversify by using other opportunities than savings accounts, certificates of deposits (CDs) or Treasury Bills.
  
  
• While these opportunities provide safety of the principal and protect against market risk, they do not protect against inflation risk. Inflation reflects a general change in price and thus reduces purchasing power of the same number of dollars, buying less and less over time. Inflation can reduce the purchasing power of investment dollars over a 10-year time by more than 25%. For example, a CD, with a 5% after-tax return and interest reinvested at 5%, looses value due to inflation rate of 3%, as shown in the illustration below:

• Examine real value (adjusted for inflation) to calculate, divide previous year's percentage by (1+.03). Example: 1.00/1.03=.9709; .9709/1.03=.9426.) Examine real net value, that is, adjusted for inflation and after taxes, which further decrease the investment dollars in purchasing power.
  
  
• Choose a tax-exempt investment if your tax bracket merits it. Tax-exempt investments such as a bond can state a lower return but effectively be equivalent or higher than the stated return on a taxable investment. Use this formula to find the equivalent for a tax-exempt investment to decide the rate needed on a taxable investment to do as well or better; or to feel more secure with the safety of a tax-exempt investment.

Investment Section I / Section II / Section III Advance to Financial Planning Return to Savings

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