"Recognizing the need is the primary condition for design."
-Charles Eames
Welcome to The Golden Sense! Money is a hard fact, you either have it or you don't. On a psychological level it's your relationship with money that often dictates whether you have enough or not. Everyone comes to a point in life where they decide to start saving for the future. I have found that people begin to start taking investing seriously once they accumulate at least $5,000. It's like breaking through a psychological barrier. At this point, many people are left staring at endless options with little idea of what to do next.
In reality, your options are not as overwhelming as they seem. It's important to choose the strategy that is appropriate for what you are trying to achieve. It's like when you go to a restaurant and the menu has a seemingly endless number of entrees on it. If you decide you want pasta then that overwhelming menu becomes much more specific. As your options are narrowed your decision is no longer as difficult.
There is a million ways to make money grow. There is also a million ways to lose money. As they say, "there is more than one way to skin a cat". If you break down monetary growth strategies into five options, this helps bring clarity to the paths you may choose.
As Albert Einstein says, "make things as simple as possible, but not simpler".
The first option you have is to continue on the same path that got you where you are. Store your money in a savings or a money market account at a bank or brokerage firm. These accounts pay minimal interest but they are considered safe places to hold your money. If you are adding to your new nest egg frequently it is not a bad idea to keep your funds in cash. You can use other simple products such as a certificate of deposit (CD) to help you earn a higher rate of interest. This is not a great long term strategy but it is the safest way to build your wealth over the short term until you accumulate enough to where you feel comfortable taking on more risk. This strategy is best for those people who don't feel comfortable diving into the investing world with just a small amount of money. Most professionals warn against this as inflation will reduce the value of cash. However, in present day 2014 short term inflation is not a huge threat but over the long term inflation will be your enemy.
The next option you have is to make your money work for you by creating a cash flow by investing in bond funds. The way you do this is to open up an online brokerage account like TD Ameritrade or Scottrade. Once you have this type of brokerage account opened, you can easily invest in bond funds. You might want to purchase shares in a few different funds. Bond funds like PFL (Pimco income strategy fund) earning 9.2%, EVG (Eaton Vance short term duration income fund) earning 7.12%, and BKLN (Powershares senior loan portfolio) earning 4.2% are securities that will generate cash flow for you on a monthly or quarterly basis. There are many more funds like this but of course doing your own research is highly advised. These funds trade like stocks and can gain or lose value in the open market. The positive aspect of these funds is that they have generous yields and can grow your nest egg by throwing off a consistent cash flow.
Another way to treat your nest egg is by doing the exact opposite of a cash flow strategy. You can systematically accumulate wealth by purchasing assets that retain value. I continually talk to educated people who refuse or seem incapable of understanding the difference between intrinsic (tangible) wealth and wealth created by government command (paper currency). Tangible wealth must be a product of search, risk, capital expenditure, or artistic creativity. Money created by government command is debt and has no intrinsic value. Tangible wealth cannot be destroyed while government created money is always diminishing in value. If this perspective of wealth rings true to you then with $5,000 you can purchase gold coins (Krugerrands) and store them in a safe place. The other option is to use a brokerage account to purchase shares in GLD or SLV. As you save more cash you can add to your positions. Gold does fluctuate in fiat currency price but history shows that gold is one of the best ways to retain your purchasing power over the long term. Remember, a person with a large quantity of gold at any point in history has always been considered rich. There is no other financial product or currency that can come close to matching that statement.
With just $5,000 you can invest in stock markets around the world. You can capture entire markets by opening up a brokerage account and purchasing shares of exchange traded funds (ETF's). You can invest in markets such as the Dow Jones Industrial Average (DIA), S&P (SPX), NASDAQ (QQQ) and even foreign markets like the Chinese stock market (FXI). These ETF's capture entire market movements without having to do research on the individual stocks that make up the market. This is a great way to invest and keep up with the market gains.
You can also invest the classical way. With a brokerage account you can invest in your own choice of individual stocks. You can create your own mix of companies and potentially beat the market. This is much more time consuming and requires due diligence on your part. When choosing stocks it is a good practice to choose stocks with low price to earning ratio's (P/E) and high dividends yielding over 3%.
As Richard Russell says, "earnings are what your accountant says they are but dividends show a company's real value."
By slowly adding to your positions on quality stocks you can build a powerful portfolio of quality companies that can grow and share their earnings with you.
These five strategies can help you build your wealth and get your nest egg on the right track. It is never too early to start saving. The earlier you start the better off you will be. Financial security and financial freedom can make your life a lot less stressful. It is never fun to worry about the lack of money, but it can be fun worrying about what to do with your excess money. I wish for everyone to achieve that in life.
Enjoy,
T. Norman
Facebook update: Since the last blog, Facebook has been a busy company. They went out purchased a virtual reality company called Oculus for $2 billion. This purchase drove the share price of Facebook down. I was uncomfortable with the price drop so I sold out at a loss. Like I said, I wasn't going to stay on a sinking ship. The drop was too much for my liking.
Will Facebook's stock price recover?
It is possible but Facebook is a momentum stock and market momentum changes faster than the direction of the wind. If you invest in Facebook, get ready to ride the volatility.
