Investment strategies are as varied as political opinions: everybody has one. Some people believe that investing is the only way that Americans will be able to afford retirement while others shy away because of fear. Before the dot-com bubble burst during the early part of the 2000s, investment was at an all-time high as many experts predicted ridiculous amounts of growth in a concept that was in its infancy: The internet. Although there was no doubt that the internet was the future, a lot of adjustments were going to be needed before e-commerce and e-business were completely viable. Obvious early winners included eBay, Amazon, and others. However, many people lost fortunes because of a lack of clarity, strategy, and reason. Investment takes much more than money. The activity requires discipline, knowledge, and time.
Investment and Debt
Many experts suggest that individuals should invest 10 to 15 percent of their income. If the value is not reasonable, then investors should adjust accordingly. However, most investment advice has a serious flaw that brokers need to address before suggesting strategies and investment avenues. Brokers and strategist often indicate that stock investments provide between 10- to 12-percent returns. The exact values are up for debate as many sources have different values and different ways of calculating return on investment (ROI). Nevertheless, assume that a stock is returning 15% annually, which, by most accounts, is a great return. The average credit card charges interest rates of about 20% or more. If someone is investing $1000 in stocks but has at least the same value in credit card debt, then the actual return would be a negative number. Therefore, before investing, individuals need to first eliminate interest debt.
The United States Securities and Exchange Commission (SEC), for example, suggests that no investment will provide the same interest earnings to match what individuals pay in credit card interest. Therefore, it makes no sense to invest in any interest-bearing security while paying interest to someone else. Prospective investors often get discouraged at such advise as paying off debt is not as exciting as investing and earning interest. However, the idea is to illustrate reality and eliminating debt is the first step toward sensible investing.
The fastest way to reduce financial liabilities is to use all funds available after paying off monthly expenses and designate those funds toward paying interest-bearing bills. If the debt is too high to pay off the commitments in a reasonable manner, then consolidating the debt may be an alternative. Many programs assist consumers in reducing debt via consolidation. The best way to consolidate debt is to enter credit counseling programs as these programs help individuals renegotiate interest rates and can significantly reduce the amount owed. Overall, this can lower the amount of time that individuals are paying interest.
Investment After Debt
Once a debt is eliminated, prospective investors can look toward investment vehicles that fit their lifestyle and personality. Individuals that are hand-off may choose between Exchange Traded Funds (ETFs) or Mutual Funds. ETFs are securities purchased through brokers that are made up of various stock, bonds, and commodities. The benefit of these funds is that they provide the ability to diversify an investment without having to purchase multiple stocks. Mad Money’s Jim Cramer often recommends this type of investment for beginners with limited investment capital or individuals that desire a hands-off approach to invest. Investors with more aggressive personalities or who want a more hands-on approach may opt to purchase stocks individually.
Investment personalities vary greatly, and a great type of investment for one individual may be a terrible investment strategy for another. Beginners should opt to obtain as much information as possible and develop strategies based on their personality. However, before trying to earn interest, individuals need to eliminate all debt that incurs interest.