Expert: Steve Hach - 9/1/2008

Question
Hello,  I am looking to invest $50K in the next few months.  my risk tolerance is low to medium.  Could you provide suggestions as to where this could be invested to receive a better than average return?  Thanks

Answer
Tim,


Successful investing takes discipline, education, and patience. A plan should be established and strictly followed for decades. My suggestion is to spend the next six months researching. The markets are a mess right now, and many institutions have taken a "wait and see" attitude.  You could do worse than sitting on your money for a bit and waiting for more favorable conditions.

Start with "Investing for Dummies", available at amazon.com and most major bookstores. This will give you the basics on most major forms of investment, and you can do further research on what appeals to you. In general, the higher the possible return of an investment, the more risky it is. As an example, a money market account will earn you about 2% a year; this is a very low gain. But it is perfectly safe and you would get that 2% every year without fail.  CD's (Certificate of Deposits) can earn perhaps 5% annual returns and are also perfectly safe, most banks offer CD's. No risk here, but your investments are locked up for one to two years depending on the CD.

The best/easiest thing to do would be to put your money into a stock market index fund.  Most major investment firms offer some sort of index fund.  On average, these funds will pay 11%/year and over time this will really add up.  Of course, the fund will go down sometimes, but will usually increase over a lifetime.

If you get more sophisticated over time you could begin to manage your own portfolio instead of using the index fund.  Yahoo finance has lots of information for individual investors.

The websites like firstrade, etrade, scottrade, etc. often low fees and low/no minimums so you can get started on a small scale.

A portfolio of stocks can earn you on average 20% or more each year. But some years will be good, and others bad. Many investors lost half or more of their worth during the bad markets of 2001 and 2002. However, over a long period of time, the risk evens out and the returns are much more substantial. An average of 20% return each year would double your investment every four years. (Not every five, as you have to account for the growth in the portfolio for the next year returns).  

Another good resource here is any of the books written by William O’Neil, founder of Investment Business Daily. Keep in mind this is one approach, but he goes into depth on how he successfully selects stocks and builds a stock portfolio. Always read with a critical mind, no one has the holy grail when it comes to investing. If they claim that they do, it is a scam. There will always be failures, but the idea is find more successes than failures. This is very possible over time.

I believe that the ultimate solution is two fold. First, move slowly. While stocks and other investments can treat you well, they can also treat you very poorly if the wrong decisions are made. Start with a money market, this is a great place to 'park' your savings while you learn more.

The book I mentioned above will help, and www.morningstar.com is perhaps the best-known source of mutual fund information available. Lipper is another. Branch out to several mutual funds that specialize in different areas such as real estate, technology, health care, utilities, or others. That way if a specific industry does poorly, you will not feel it too badly.

Only after a few years or whenever you feel confident should you venture into stocks. But start practicing right away. Begin researching possible stocks you would want to invest in (again the book I mentioned will help you learn what to look for).  Track your ideas on a free service such as yahoo.finance.com and see what your stock picks do.

There is another alternative. If you want to get started right away, consider an index mutual fund. These are funds that exactly copy the major stock market indexes. For example, the Vanguard S&P500 index fund is a good one, this one copies the Standard and Poors 500 Index. If you invest in this one fund, your performance will exactly match that index. You will never perform better, or worse, than the overall index. Over the years you could expect perhaps 12% returns on average, again some years will be much greater and some much worse. The symbol is VFINX, and you can buy this on any major trading service website. It is a great way to get started while you learn more.

But remember, the markets have been going DOWN, so it is best to make sure that they are going up again before you put your hard-earned money into play.  


I would just stress the following points:

1. Avoid debt like the plague!  Do NOT run up credit card debts.  

2. Save money. .

3. Read a good newspaper everyday--like the New York Times or Wall Street Journal.  Read the news AND the business section

4.  Take a college course in finance and/or US economic history.

5.  Invest your money in a stock market index fund.  Try to find one with low fees.  Leave that money there and do not try to chase the markets.  You want to gain over time, you don't need to day trade or worry if things go up a bit or down some.  Think long term.


Best of luck with your investments!



Steve