Which vehicle you choose for your investment journey depends on where you’re hoping to go, how fast you want to get there, and what risks you’re willing to take.
Everyone should have some money in stable, safe investment vehicles, including money that you’ve earmarked for your near-term expenses, both expected and unexpected. Likewise, if you’re saving money for a home purchase within the next few years, you certainly don’t want to risk that money on the roller coaster of the stock market.
The investment options that follow are appropriate for money you don’t want to put at great risk.
1. Transaction/checking accounts
Transaction/checking accounts are best used for depositing your monthly income and paying your bills. If you want to have unlimited bill paying and check-writing privileges and access to your money with an ATM card, checking accounts at local banks are often your best bet.
Here’s how not to waste money on banks:
- Consider small banks, credit unions, and online banks. You may get a better checking account deal at a credit union, a smaller bank, or one that operates online only. Because you can easily obtain cash through ATM outlets in supermarkets and other retail stores, you may not need to do business with Big City Bank, which has ATMs and branch offices at every intersection. Whatever institution you use, make sure your deposits are fully insured by the FDIC or NCUA.
- Shop around. Some banks don’t require you to maintain a minimum balance to avoid a monthly service charge when you direct-deposit your paychecks. Make sure that you shop around for accounts that don’t ding you $2 or $3 here for the use of an ATM and $15 there for a low balance.
- Limit the amount you keep in checking. Keep only enough money in the account for your monthly bill payment needs. If you consistently keep more than a few thousand dollars in a checking account, get the excess out. You can generally earn more in a savings or money-market account, which I describe in the following section. And, if you’re a high roller, be sure to limit the total amount you invest at any one institution to avoid exceeding insurance limits.
- Don’t do your checking through the bank. Some folks (me included) don’t have a bank checking account. Discount brokerage accounts offer unlimited bill paying and check-writing within a money-market fund.
2. Savings accounts and money-market funds
Savings accounts are available through banks; money-market funds are available through mutual-fund companies. Savings accounts and money-market funds are nearly identical, except that money-market funds generally pay a better rate of interest. The interest rate paid to you, also known as the yield, fluctuates over time, depending on the level of interest rates in the overall economy. (Note that some banks offer money-market accounts, which are basically like savings accounts and shouldn’t be confused with money-market mutual funds.)
The federal government backs bank savings accounts with Federal Deposit Insurance Corporation (FDIC) insurance. Money-market funds are not insured. But don’t give preference to a bank account just because your investment (principal) is insured. In fact, your preference should lean toward money-market funds, because the better ones are higher-yielding than the better bank savings accounts. And money-market funds offer check-writing and other easy ways to access your money.
Money-market funds generally have several advantages over bank savings accounts:
- The best money-market funds have higher yields.
- If you’re in a higher tax bracket, you may net more after factoring in taxes using tax-free money-market funds. No savings account pays tax-free interest.
- Most money-market funds come with free check-writing privileges. (The only stipulation is that each check must be written for a minimum amount — $250 is common.)
As with money you put into bank savings accounts, money-market funds are suitable for money that you can’t afford to see dwindle in value.
When you invest in a bond, you effectively lend your money to an organization. When a bond is issued, it includes a specified maturity date at which time the principal will be repaid. Bonds are also issued at a particular interest rate, or what’s known as a coupon. This rate is fixed on most bonds. So, for example, if you buy a five-year, 6 percent bond issued by Home Depot, you’re lending your money to Home Depot for five years at an interest rate of 6 percent per year. (Bond interest is usually paid in two equal, semi-annual installments.)
The value of a bond generally moves opposite of the directional change in interest rates. For example, if you’re holding a bond issued at 6 percent and rates on similar bonds increase to 8 percent, your 6 percent bond will decrease in value. (Why would anyone want to buy your bond at the price you paid if it yields just 6 percent and 8 percent can be obtained elsewhere?)
Some bonds are tied to variable interest rates. For example, you can buy bonds that are adjustable-rate mortgages, on which the interest rate can fluctuate. As an investor, you’re actually lending your money to a mortgage borrower — indirectly, you’re the banker making a loan to someone buying a home.
Bonds differ from one another in the following major ways:
- The type of institution to which you’re lending your money: With municipal bonds, you lend your money to the state or local government or agency; with Treasuries, you lend your money to the federal government; with GNMAs (Ginnie Maes), you lend your money to a mortgage holder (and the federal government backs the bond); with corporate bonds, you lend your money to a corporation.
- The credit quality of the borrower to whom you lend your money: Credit quality refers to the probability that the borrower will pay you the interest and return your principal as agreed.
- The length of maturity of the bond: Short-term bonds mature within a few years, intermediate bonds within 3 to 10 years, and long-term bonds within 30 years. Longer-term bonds generally pay higher yields but fluctuate more with changes in interest rates.
Bonds are rated by major credit-rating agencies for their safety, usually on a scale where AAA is the highest possible rating. For example, high-grade corporate bonds (AAA or AA) are considered the safest (that is, most likely to pay you back). Next in safety are general bonds (A or BBB), which are still safe but just a little less so. Junk bonds rated BB or B are actually not all that junky; they’re just lower in quality and have a slight (1 or 2 percent) probability of default over long periods of time. Junk bonds with even lower ratings — such as C or lower — carry higher default rates.
Some bonds are callable, which means that the bond’s issuer can decide to pay you back earlier than the previously agreed-upon date. This event usually occurs when interest rates fall and the lender wants to issue new, lower-interest-rate bonds to replace the higher-rate, outstanding bonds. To compensate you for early repayment, the lender typically gives you a small premium over what the bond is currently valued at.
A certificate of deposit (CD) is another type of bond that’s issued by a bank. With a CD, as with a real bond, you agree to lend your money to an organization (in this case, a bank) for a predetermined number of months or years. Generally, the longer you agree to lock up your money, the higher the interest rate you receive.
With CDs, you pay a penalty for early withdrawal. If you want your money back before the end of the CD’s term, you get whacked with the loss of a number of months’ worth of interest. CDs also don’t tend to pay very competitive interest rates. You can usually beat the interest rate on shorter-term CDs (those that mature within a year or so) with the best money-market mutual funds, which offer complete liquidity without any penalty.
4. Mutual funds and exchange-traded funds (ETFs)
Efficiently managed mutual funds offer investors low-cost access to high-quality money managers. Mutual funds span the spectrum of risk and potential returns, from nonfluctuating money-market funds (which are similar to savings accounts) to bond funds (which generally pay higher yields than money-market funds but fluctuate with changes in interest rates) to stock funds (which offer the greatest potential for appreciation but also the greatest short-term volatility).
Investing in individual securities should be done only by those who really enjoy doing it and are aware of and willing to accept the risks in doing so. Mutual funds and exchange-traded funds (see the next section), if properly selected, are a low-cost, quality way to hire professional money managers. Over the long haul, you’re highly unlikely to beat full-time professional managers who are investing in securities of the same type and at the same risk level.
Understanding exchange-traded funds, hedge funds, and managed accounts
Mutual funds aren’t the only game in town when it comes to hiring a professional money manager. Three additional options you may hear about include:
- Exchange-traded funds (ETFs): These funds are the most similar to mutual funds except that they trade on a major stock exchange and thus can be bought and sold during the trading day. The best ETFs have low fees and, like an index fund, invest to track the performance of a stock market index.
- Hedge funds: These privately managed funds are for wealthier investors and are generally riskier (some even go bankrupt) than a typical mutual fund. The fees can be steep — typically 20 percent of the hedge fund’s annual returns as well as an annual management fee of 1 percent or so. They’re also generally illiquid — there are usually lock-up periods, and it can still be difficult to get your money back out later when needed. I generally don’t recommend them.
- Managed accounts: The major brokerage firms, which employ brokers on commission, offer access to private money managers. In reality, this option isn’t really different from getting access to fund managers via mutual funds, but you’ll generally pay a much higher fee, which reduces this option’s attractiveness.
5. Individual stocks
My experience is that plenty of people choose to invest in individual securities because they think that they’re smarter or luckier than the rest. I don’t know you personally, but it’s safe to say that in the long run, your investment choices are highly unlikely to outperform those of the best full-time investment professionals and index funds.
When I was a financial counselor, I noticed a distinct difference between the sexes on this issue. Perhaps because of the differences in how people are raised, testosterone levels, or whatever, men tend to have more of a problem swallowing their egos and admitting that they’re better off not selecting their own individual securities. Maybe the desire to be a stock picker is genetically linked to not wanting to ask for directions!
Investing in individual stocks entails numerous drawbacks and pitfalls:
- You need to spend a significant amount of time doing research. When you’re considering the purchase of individual security, you need to know a lot about the company in which you’re thinking about investing.
- Your emotions will probably get in your way. Analyzing financial statements, corporate strategy, and the competitive position requires great intellect and insight. However, those skills aren’t nearly enough. Will you have the stomach to hold on after what you thought was a sure-win stock plunges 20, 30, 40, or 50 percent? Will you have the courage to dump such stock if your new research suggests that the plummet is the beginning of the end rather than just a big bump in the road? When your money is on the line, emotions often kick in and undermine your ability to make sound long-term decisions. Few people have the psychological constitution to invest in individual stocks and handle and outfox the financial markets.
- You’re less likely to diversify. Unless you have tens of thousands of dollars to invest in different stocks, you probably can’t cost-effectively afford to research, develop, and monitor a diversified portfolio. For example, when you’re investing in stocks, you should hold companies in different industries, different companies within an industry, and so on. By not diversifying, you unnecessarily add to your risk.
- You’ll face accounting and bookkeeping hassles. When you invest in individual securities outside retirement accounts, every time you sell a specific security, you must report that transaction on your tax return. Even if you pay someone else to complete your tax return, you still have the hassle of keeping track of statements and receipts.
Researching individual stocks can be more than a full-time job, and if you choose to take this path, remember that you’ll be competing against the professionals who do so on a full-time basis. If you derive pleasure from picking and following your own stocks, or you want an independent opinion of some stocks you currently own, useful research reports are available from Value Line (call 800-825-8354 or visit www.valueline.com). I also recommend that you limit your individual stock holdings to no more than 20 percent of your overall investments.
Many corporations allow existing shareholders to reinvest their dividends (their share in company profits) in more shares of stock without paying brokerage commissions. In some cases, companies allow you to make additional cash purchases of more shares of stock, also commission-free.
In order to qualify, you must first generally buy some shares of stock through a broker (although some companies allow the initial purchases to be made directly from them). Ideally, you should purchase these initial shares through a discount broker to keep your commission burden as low as possible.
Some investment associations also have plans that allow you to buy one or just a few shares to get started. You typically need to complete some forms to invest in a number of different companies’ stocks. Life is too short to bother with these plans for this reason alone.
Finally, even with those companies that do sell stock directly without charging an explicit commission like a brokerage firm, you pay plenty of other fees. Many plans charge an up-front enrollment fee, fees for reinvesting dividends, and a fee when you want to sell.
6. International stocks
Not only can you invest in company stocks that trade on the U.S. stock exchanges, but you can also invest in stocks around the world. If you’re in the United States, you may ask, “Why would you want to invest in international stocks?”
I can give you several reasons:
- Many investing opportunities exist overseas. If you look at the total value of all stocks outstanding worldwide, the value of foreign stocks typically equals or exceeds the value of U.S. stocks.
- When you confine your investing to U.S. securities, you miss a world of opportunities, not only because of business growth available in other countries but also because you get the opportunity to diversify your portfolio even further.
International securities markets don’t move in tandem with U.S. markets. During various U.S. stock market drops, some international stock markets drop less, whereas others may sometimes rise in value.
Some people hesitate to invest in overseas securities out of concern that overseas investing hurts the U.S. economy and contributes to a loss of American jobs. I have some counterarguments. First, if you don’t profit from the growth of economies overseas, someone else will. If there’s money to be made, Americans may as well be there to participate. Profits from a foreign company are distributed to all stockholders, no matter where they live. Dividends and stock price appreciation know no national boundaries.
Also, recognize that you already live in a global economy. Making a distinction between U.S. and non-U.S. companies is no longer appropriate. Many companies that are headquartered in the United States also have overseas operations. Some U.S. firms derive a large portion of their revenue from their international divisions. Conversely, many firms based overseas also have U.S. operations. An increasing number of companies are worldwide operations.
So where are the major investing opportunities outside the United States? International investing managers generally look at opportunities in three major geographic regions:
- Latin America: Includes countries such as Argentina, Brazil, Chile, Columbia, Costa Rica, Mexico, Panama, and Peru.
- Europe: Includes countries such as Belgium, Denmark France, Germany, Ireland, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom.
- Asia-Pacific: Includes countries such as Australia, China, India, Japan, Hong Kong, India, New Zealand, Singapore, South Korea, Taiwan, Thailand, and Vietnam.
Companies in Canada are generally a small investment portion held by many international and global stock funds. Canadian holdings may be listed separately or as a part of North America holdings.
Another way in which foreign stocks are categorized is between developed markets and emerging markets.
- Developed markets are characterized by more mature, stable, and secure economies with relatively high standards of living. Examples include countries such as Australia, Canada, France, Germany, Japan, Switzerland, and the United Kingdom.
- Emerging markets tend to be more volatile and typically higher growth economies that are in their early economic stages. Examples include countries such as Brazil, China, Chile, India, Indonesia, Malaysia, Mexico, Russia, South Africa, and Thailand.
7. Real estate
Over the generations, real estate owners and investors have enjoyed rates of return comparable to those produced by the stock market, thus making real estate another time-tested method for building wealth. However, like stocks, real estate goes through good and bad performance periods. Most people who make money investing in real estate do so because they invest over many years and do their homework when they buy to ensure that they purchase good property in solid locations at an attractive/fair price.
Buying your own home is the best place to start investing in real estate. The equity (the difference between the market value of the home and the loan owed on it) in your home that builds over the years can become a significant part of your net worth. Among other things, you can tap this equity to help finance other important personal goals, such as retirement, college, and starting or buying a business. Moreover, throughout your adult life, owning a home should be less expensive than renting a comparable home.
Real estate: Not your ordinary investment
Real estate differs from most other investments in several respects. Here’s what makes real estate unique as an investment:
- You can live in it. You can’t live in a stock, bond, or mutual fund (although I suppose you can glue together a substantial fortress with all the paper some of these companies fill your mailbox with each year). Real estate is the only investment you can use (by living in it or renting it out) to produce income.
- Land is in limited supply. The percentage of the Earth occupied by land is relatively constant. And because humans like to reproduce, the demand for land and housing continues to grow. Consider the areas that have the most expensive real-estate prices in the world — Hong Kong, Tokyo, Hawaii, San Francisco, and Manhattan. In these densely populated areas, little if any new land is available for building new housing.
- Zoning shapes potential value. Local government regulates the zoning of property, and zoning determines what a property can be used for. In most communities these days, local zoning boards are against big growth. This position bodes well for future real-estate values. Also know that in some cases, a particular property may not have been developed to its full potential. If you can figure out how to develop the property, you can reap large profits.
- You don’t need a lot of cash up front. Real estate is also different from other investments because you can borrow a lot of money to buy it — up to 80 to 90 percent or more of the value of the property. This borrowing is known as exercising leverage: With only a small investment of 10 to 20 percent down, you’re able to purchase and own a much larger investment. When the value of your real estate goes up, you make money on your investment and on all the money you borrowed. (In case you’re curious, you can leverage nonretirement-account stock and bond investments through margin borrowing. However, you have to make a much larger “down payment” — about double to triple the percentage you need to buy real estate.) For example, suppose you plunk down $20,000 to purchase a property for $100,000. If the property appreciates to $120,000, you make a profit of $20,000 (on paper) on your investment of just $20,000. In other words, you make a 100 percent return on your investment. But leverage cuts both ways. If your $100,000 property decreases in value to $80,000, you actually lose (on paper) 100 percent of your original $20,000 investment, even though the property value drops only 20 percent.
- You can discover hidden value. In an efficient market, the price of an investment accurately reflects its true worth. Some investment markets are more efficient than others because of the large number of transactions and easily accessible information. Real-estate markets can be inefficient at times. Information is not always easy to come by, and you may find an ultra-motivated or uninformed seller. If you’re willing to do some homework, you may be able to purchase a property below its fair market value (perhaps by as much as 10 to 20 percent).
Just as with any other investment, real estate has its drawbacks. For starters, buying or selling a property generally takes time and significant cost. When you’re renting property, you discover firsthand the occasional headaches of being a landlord. And especially in the early years of rental property ownership, the property’s expenses may exceed the rental income, producing a net cash drain.
The best real estate investment options
Although real estate is unique in some ways, it’s also like other types of investments in that prices are driven by supply and demand. You can invest in homes or small apartment buildings and then rent them out. In the long run, investment-property buyers hope that their rental income and the value of their properties will increase faster than their expenses.
When selecting real estate for investment purposes, remember that local economic growth is the fuel for housing demand. In addition to a vibrant and diverse job base, you want to look for limited supplies of both existing housing and land on which to build. When you identify potential properties in which you may want to invest, run the numbers to understand the cash demands of owning the property and the likely profitability.
8. Small business
Small business is the leading investment through which folks have built the greatest wealth. You can invest in small business by starting one yourself (and thus finding yourself the best boss you’ve probably ever had), buying an existing business, or investing in someone else’s small business. Even if small business doesn’t interest you, hopefully your own job does, so I present some tips on making the most of your career.
Launching your own enterprise
When you have self-discipline and a product or service you can sell, starting your own business can be both profitable and fulfilling. Consider first what skills and expertise you possess that you can use in your business. You don’t need a “eureka”-type idea or invention to start a small business. Millions of people operate successful businesses that are hardly unique, such as dry cleaners, restaurants, tax preparation firms, and so on.
Begin exploring your idea by first developing a written business plan. Such a plan should detail your product or service, how you’re going to market it, your potential customers and competitors, and the economics of the business, including the start-up costs.
Of all the small-business investment options, starting your own business involves the most work. Although you can do this work on a part-time basis in the beginning, most people end up running their business full-time — it’s your new job, career, or whatever you want to call it.
I’ve been running my own business for most of my working years, and I wouldn’t trade that experience for the corporate life. That’s not to say that running my own business doesn’t have its drawbacks and down moments. But in my experience counseling small-business owners, I’ve seen many people of varied backgrounds, interests, and skills succeed and be happy with running their own businesses.
In most people’s eyes, starting a new business is the riskiest of all small-business investment options. But if you’re going into a business that uses your skills and expertise, the risk isn’t nearly as great as you may think. Many businesses can be started with little cash by leveraging your existing skills and expertise.
You can build a valuable company and job if you have the time to devote. As long as you check out the competition and offer a valued service at a reasonable cost, the principal risk with your business comes from not doing a good job marketing what you have to offer. If you can market your skills and have a plan to get through the inevitable economic down cycles that affect every business, you’re home free.
Buying an existing business
If you don’t have a specific product or service you want to sell but you’re skilled at managing and improving the operations of a company, buying a small business may be for you. Finding and buying a good small business takes much time and patience, so be willing to devote at least several months to the search. You may also need to enlist financial and legal advisors to help inspect the company, look over its financial statements, and hammer out a contract.
Although you don’t have to go through the riskier start-up period if you buy a small business, you’ll likely need more capital to buy an established enterprise. You’ll also need to be able to deal with stickier personnel and management issues. The history of the organization and the way things work will predate your ownership of the business. If you don’t like making hard decisions, firing people who don’t fit with your plans, and coercing people into changing the way they do things, buying an existing business likely isn’t for you.
Some people perceive buying an existing business as being safer than starting a new one. Buying someone else’s business may actually be riskier. You’re likely to shell out far more money upfront, in the form of a down payment, to buy an existing business. If you don’t have the ability to run the business and it does poorly, you have more to lose financially. In addition, the business may be for sale for a reason — it may not be very profitable, it may be in decline, or it may generally be a pain in the neck to operate.
Good businesses don’t come cheap. If the business is a success, the current owner has already removed the start-up risk from the business, so the price of the business should be at a premium to reflect this lack of risk. When you have the capital to buy an established business and you have the skills to run it, consider going this route.
Investing in someone else’s small business
Are you someone who likes the idea of profiting from successful small businesses but doesn’t want the day-to-day headaches of being responsible for managing the enterprise? Then investing in someone else’s small business may be for you. Although this route may seem easier, few people are actually cut out to be investors in other people’s businesses. The reason: Finding and analyzing opportunities isn’t easy.
Are you astute at evaluating corporate financial statements and business strategies? Investing in a small, privately held company has much in common with investing in a publicly traded firm (as is the case when you buy stock), but it also has a few differences. One difference is that private firms aren’t required to produce comprehensive, audited financial statements that adhere to certain accounting principles. Thus, you have a greater risk of not having sufficient or accurate information when evaluating a small, private firm.
Another difference is that unearthing private, small-business investing opportunities is harder. The best private companies who are seeking investors generally don’t advertise. Instead, they find prospective investors through networking with people such as business advisors. You can increase your chances of finding private companies to invest in by speaking with tax, legal, and financial advisors who work with small businesses. You can also find interesting opportunities through your own contacts or experience within a given industry.
Don’t consider investing in someone else’s business unless you can afford to lose all of what you’re investing. Also, you should have sufficient assets so that what you’re investing in small, privately held companies represents only a small portion (20 percent or less) of your total financial assets.
9. Precious metals
Gold and silver have been used by many civilizations as currency or a medium of exchange. One advantage of precious metals as a currency is that they can’t be debased by the government. With paper currency, such as U.S. dollars, the government can simply print more. This process can lead to the devaluation of a currency and inflation.
Holdings of gold and silver can provide a so-called hedge against inflation. In the late 1970s and early 1980s, inflation rose dramatically in the United States. This largely unexpected rise in inflation depressed stocks and bonds. Gold and silver, however, rose tremendously in value — in fact, more than 500 percent (even after adjusting for inflation) from 1972 to 1980. Such periods are unusual. Precious metals produced decent returns in the 2000s, but, after peaking in 2011, precious metals prices fell steeply.
Over many decades, precious metals tend to be lousy investments. Their rate of return tends to keep up with the rate of inflation but not surpass it.
When you want to invest in precious metals as an inflation hedge, your best option is to do so through mutual funds or exchange-traded funds. Don’t purchase precious metals futures. They’re not investments; they’re short-term gambles on which way gold or silver prices may head over a short period of time.
I also recommend staying away from firms and shops that sell coins and bullion (not the soup, but bars of gold or silver). Even if you can find a legitimate firm (not an easy task), the cost of storing and insuring gold and silver is quite costly. You won’t get good value for your money — markups can be substantial.
10. Bitcoin and other cryptocurrencies
Perhaps you have heard of Bitcoin — the online “currency.” I find that far more young adults know about it than older folks do, which makes sense because it’s a digital currency used for Internet transactions.
Increasingly, Bitcoin has been in the news more and more as its price climbs to ever dizzying higher heights. In December 2017 the price of a Bitcoin neared the $20,000 mark.
So what exactly is Bitcoin? For starters, it’s not actually a coin — that’s a marketing gimmick to call it a coin to make it sound like a real currency. Bitcoin and other similar cryptocurrrencies only exist in the online world. Bitcoin’s creators have limited the number of Bitcoins that can be “mined” and put into online circulation to about 21 million (more on mining later in this section).
As its promoters have talked up its usefulness and dizzying rise, many people who have Bitcoins continue to hold onto them in the hopes that the price will keep rising. Like shares of stock in the next Amazon.com or Apple, its owners and promoters are hoping and expecting for further steep price increases. People don’t hoard real currencies with similar pie-in-sky hopes for large investment returns.
Ethereum is the second most popular cryptocurrency as people discover that it allows for incorporating smart contracts, which are computer-based and enforced contracts that delineate specific conditions that must be met in order for the transaction to be completed.
Bitcoin looks attractive, but it comes with many risks and problems. Here are some major issues:
- No repercussions or recourse: Online Bitcoin transactions can be done anonymously, and they can’t be contested, disputed, or reversed. If you buy something using Bitcoin and have a problem with the item you bought, that’s too bad — you have no recourse unlike for example with a purchase made on your credit card. The clandestine nature of cryptocurrencies makes them attractive to folks trying to hide money or engaged in illegal activities (for instance criminals, drug dealers, and so on).
- No inherent value: Contrast that with gold. Not only has gold had a long history of being used as a medium of exchange (currency), gold has commercial and industrial uses. Furthermore, gold costs real money to mine out of the ground, which provides a floor of support under the price of gold in the range of $800 to $900 per ounce, not far below the recent price of gold at about $1,280 per ounce. (Bitcoin does have a made-up mining process whereby you need special computer equipment and end up using a bunch of electricity to solve complex math problems.)
- Not unlimited: The supply of Bitcoin is currently artificially limited. And Bitcoin is hardly unique — it’s one of hundreds of cryptocurrencies. So if another cryptocurrency or two or three is easier to use online and perceived as attractive (in part because it’s far less expensive), Bitcoin will eventually tumble in value.
- Not universally accepted: Even though Bitcoin has been the most popular cryptocurrency in recent years, few merchants actually accept it. And, to add insult to injury, Bitcoin users get whacked with unfavorable conversion rates, which add greatly to the effective price of items bought with Bitcoin.
In May 2018, about $375 billion was tied up in these cryptocurrencies according to CoinMarketCap.com, which now tracks about 1,600 cryptocurrencies. Over the preceding years, Bitcoin’s market share has dropped from nearly 90 percent to about 35 percent. CoinMarketCap.com tracks the 100 largest cryptocurrencies as measured by their market capitalizations — number 100 on the list recently had a market cap of about $160 million.
I can’t tell you what will happen to Bitcoin’s price next month, next year, or next decade. But I can tell that it has virtually no inherent value as a digital currency so those paying thousands of dollars for a Bitcoin will eventually be extremely disappointed. With more than 1,500 of these cryptocurrencies, the field keeps growing as creators hope to get in on the ground floor of the next cryptocurrency, which they hope will soar in value.
A recent Wall Street Journal investigation found, “Hundreds of technology firms raising money in the fevered market for cryptocurrencies are using deceptive or even fraudulent tactics to lure investors…. The Wall Street Journal has found 271 with red flags that include plagiarized investor documents, promises of guaranteed returns, and missing or fake executive teams.”
Annuities are a peculiar type of insurance and investment product. They’re a sort of savings-type account with slightly higher yields, and they’re backed by insurance companies. Fixed annuities pay a preset interest rate determined by the insurance company. This rate is typically set one year ahead at a time. Variable annuities’ return varies over time depending on the returns provided by which investment is chosen within the annuity offerings.
As with other types of retirement accounts, money placed in an annuity compounds without taxation until it’s withdrawn. However, unlike most other types of retirement accounts, such as 401(k)s, SEP-IRAs, and 403(b)s, you don’t receive upfront tax breaks on contributions you make to an annuity.
Ongoing investment expenses also tend to be much higher than in retirement plan accounts. Therefore, consider an annuity generally only after you fully fund tax-deductible retirement accounts. There’s one other possible personal use for annuities: Those nearing or in retirement with limited resources can insure against the risk of outliving their assets by buying an annuity and annuitizing it — again, at a cost, so proceed carefully.
The collectibles category is a catchall for antiques, art, autographs, baseball cards, clocks, coins, comic books, diamonds, dolls, gems, photographs, rare books, rugs, stamps, vintage wine, and writing utensils — in other words, any material object that, through some kind of human manipulation, has become more valuable to certain humans.
Notwithstanding the few people who discover on Antiques Roadshow that they own an antique of significant value, collectibles are generally lousy investment vehicles. Dealer markups are enormous, maintenance and protection costs are draining, research is time-consuming, and people’s tastes are quite fickle. All this for returns that, after you factor in the huge markups, rarely keep up with inflation.
Furthermore, long-term investment gains (of more than one year) you do earn on collectibles are currently taxed at your ordinary federal income tax rate with a cap of 28 percent, which is higher the rates on than the long-term capital gains tax rate on stocks, real estate, and small business (20 percent) held for a year or more.
Buy collectibles for your love of the object, not for financial gain. Treat collecting as a hobby rather than as an investment. When buying a collectible, try to avoid the big markups by cutting out the middlemen. Buy directly from the artist or producer if you can.