Expert: Gina Boykin - 7/30/2007

Question
hi,

i want to know what the best option is for me to invest about $30,000. i lost my job two years ago due to a disability. however, i receive a pension ($30,000 annually) and benefits for the rest of my life. i also own a waterfront house with no mortgage valued at 400k. i own a car with only 2 payments left and i have 0 debt.

i know i'm in very very good shape already. but, i feel i can do better. i'm not keen with the stock market at all. any thoughts?

Answer
Tyler, you are in GREAT shape!

There are many options.  However, there is no "one size fits all" so the best choice for you will depend on your risk tolerance, your time frame, your tax bracket, and your goals.

Here are some questions you should consider when making financial choices...
1.  Are you interested in cash flow (income every month/week/year) or capital gains (growth in your net worth)?
2.  Do you want security or great wealth?
3.  Are you concerned about taxes or want to decrease your taxes?
4.  Are you investing for short-term or long-term goals?

I'll cover a few options here...

*** STOCKS ***

There are several thousand stocks to chose from, but you can narrow them down without too much difficulty.

Are there publicly traded companies in your field (whatever job you had before you became disabled)?  If so, this is a good place to start.  

Do you spend money regularly on something?  Most people will answer "yes" to this.  For example, if you eat out a lot at a particular restaurant, or purchase a certain product, look at these companies.

Another way to narrow the list is based on your interest.  For example, if you are into sports, you could look at some of the sports apparel companies.

If you're going to select individual companies, stick with what you know or like.

Advantages - You will own a part of a company that has the potential to grow and/or provide you with income (through dividends).  These stocks can be passed on with your estate to future generations.

Disadvantages - It may be hard to select a company at first.  You will pay a commission each time you buy or sell stock.  To buy enough shares to profit may require a large sum (compared to a mutual fund).

Notes - If you want cash flow, purchase a stock that has a history of paying dividends.  If you want capital gains, purchase a stock that you believe will increase.  Stocks are not for people who are concerned about security but are perfect for people who want wealth.  They are usually long-term investments, but you can day-trade if you want to take the time to do the research.


*** INDEX FUNDS ***

If you don't want to do a lot of research, then an index fund may be good for you.  An index fund is a mutual fund that follows an index (like the S&P 500, Dow Jones, Wilshire Index, the Bond market, etc).  You can basically own a piece of 500 to 3,000 stocks with one index fund.  

Low cost - If a professional mutual fund manager has to make decisions regularly on which funds to buy/sell, he is going to charge more money.  Index funds have the same securities as the index.  It doesn't require much thinking (by the manager) so it costs less.

Less taxes - A regular mutual fund manager buys/sells stocks regularly, which causes capital gains distributions.  An index fund rarely does this, so you most likely won't have to pay taxes until you sell your shares.

Less research - An index fund is the simplest, easiest way to invest.  The decisions you'll have to make are:

1.  What type of index fund?  There are index funds that invest in large, medium (mid-cap), or small (small-cap) stocks.  There are also bond index funds, and there are international index funds that invest in companies overseas or "emerging markets" (developing countries).

2.  What broker?  You can pick from all the majors - Fidelity, Vanguard, E-Trade, Charles Shwabb...

3.  What amount?  You can invest with a lump sum (the minimum can range from $1,000-$2,5000) or sign up for an automatic investing program, where a certain amount is transferred each month from your checking/savings account.

Advantages - Index funds are the "no brainer" choice for stock investing.  They have lower management fees, no commissions, and less capital gains taxes.  Most mutual fund managers do not "beat the market".  With an index fund, you will be assured that you will match the market.  You can start small and grow your investment over time.

Disadvantages - Not for short-term investing.  You cannot tailor your investments or day trade with index funds.

Notes -  You can achieve income with a bond index fund.  You can achieve capital gains with a stock index fund.  Index funds are usually for long-term investing.  You will most likely not pay taxes until you sell your shares.

SPECIAL NOTE ON TAXES!!
You can buy stocks and/or index funds in a Roth IRA, and your earnings will grow TAX-FREE!  You can take your contributions out without penalty, so this may be a good way to invest if you chose stocks or mutual funds.

*** START OR JOIN AN INVESTMENT CLUB ***

A great way to learn and invest is through an investment club.  It doesn't mean that you have to pool your money to purchase stocks.  It can just be an educational and support club.  Each person can research a different topic and you will all learn together.  To find an investment club, you can go to the NAIC (National Association of Investment Clubs), you can join a Cash Flow club (people who learn through playing Robert Kiyosaki's Cash Flow game), or you can ask around in your neighborhood/church/community organizations and start one.

*** FOREX ***

FOREX stands for Foreign Currency or Foreign Exchange.  You can buy and sell currency just like stocks.  The major currencies are the USD(US Dollar) CHF (Swiss Franc), GBP(Great Britain Pound), JPY (Japan Yen), EUR (Euro).

Advantages- there are only 4 major currency pairs vs. thousands of stocks, the market is open 24 hrs a day during the week, there are no commissions charged when you buy or sell, you can buy with leverage, and you receive interest on your investment (in addition to the growth

Disadvantages- Risk comparable to individual stocks.  Because you can use leverage to purchase forex pairs, you have greater risk and potential rewards.

Notes - Forex can be purchased through an IRA to limit your tax exposure.  There are both short and long-term strategies.  Forex investing provides income (interest earned) and capital gains (growth of currency's value).

*** BONDS ***

There are three types of bonds:  Government bonds, Corporate bonds, and Municipal bonds.

Bonds are a way for a company, agency, or locality to raise money for a project.  You are basically loaning money in exchange for interest (A.K.A coupon rate) for a certain amount of time. In the meantime, you receive interest each period (month, semi-annually, yearly).  At the end of this time (A.K.A maturity date), you receive all of your money back.

You can buy bonds directly, or through a Bond Fund (which is a mutual fund that invests in bonds) or a Bond Index Fund (which follows the bond market).

If you buy a bond when it is issued, you pay face value (A.K.A "Par Value").  For example, you can buy a $1,000 bond that pays 6% interest.  You will receive $60 each year (or $15 quarterly, $30 semi-annually) until the bond matures.

If you buy a bond after it was issued, the price of the bond could be higher or lower than the original par value.  If interest rates are rising, bond prices will be lower (sold at a "discount") and if interest rates fall, bond prices will rise (sold at a "premium").  The reason is this:  If you could buy a bond that pays 7%, why would you buy an older 6% bond?  You wouldn't, so the 6% bond has to lower it's price to make it more attractive.  Don't get too confused about this, though.  If you look up company bonds, the rate and the yield will be listed.  The yield is the important percentage, because it takes any discount or premium into account.

If you chose to purchase a bond, you will need to narrow them down by the bond's rating. They range from AAA-C (rated by S&P and Moody's) as shown below:

AAA-Top Quality, AA-Excellent, A-Very high, BBB-Medium, BB-Speculative, etc... and C is in default.

If you chose to buy a bond fund or bond index fund, you can open account with any major broker.

Municipal bonds are good for anyone in the 28% or higher tax bracket, so this may or may not apply to your household.  Municipal bonds are issued by states, counties, towns, and cities.  Interest that you earn is exempt from federal income tax, AND if you select a local municipal bond, it will be exempt from state and/or local taxes as well.

Advantages - If you want fixed income, bonds are a great investment.  You can select a bond that mature when you need the money for a particular financial goal.  Interest income for municipal bonds is not subject to federal tax and may not be subject to state/local tax.

Disadvantages - If interest rates decline, your bond's value could decrease.  To avoid this, wait to sell until maturity.  You will get the original face value at maturity.  Interest income for corporate bonds is subject to federal, state, and local tax.

Notes - You can invest in individual bonds with as little as $5,000.  You can also invest in bond mutual or index funds for lower amounts.  Bonds provide security (fixed income) as opposed to capital gains.

*** REAL ESTATE ***

Have you ever thought about purchasing real estate?  If you've lived in the same area for many years, you may be in a great position to purchase local property.  The housing market in many areas has slowed and you can get great deals.  If you're not interested in being a landlord, you don't have to be.  Just hire a property management company to find a tenant, collect the money, and deal with property issues as they arise.  I don't want to make it sound so simple, but there are plenty of educational websites/books/tapes/seminars on the subject.

There's also a way to invest in real estate without purchasing property, and that is through a REIT (real estae investment trust).  REITs are like mutual funds.  They invest in several properties or mortgages.  Purchasing a REIT is done in the same manner as stocks.  REITs usually pay atleast 90% of their income to shareholder (in the form of dividends) so that they can avoid taxation.  This a great form of investing if you are interested in regular income.  REITs are evaluated by Value Line.  Look at the rating before chosing to invest.

Advantages - real estate has the greatest tax benefits, allows you to use leverage (other people's money), and can provide great rewards long-term

Disadvantages - it's easy to make mistakes with real estate (wrong location, bad tenants, etc) - so do your homework!

Notes - Real estate investing provides cash flow (monthly payments) and capital gains (appreciation of the property's value).  Renting is a long-term investment, Flipping houses is a short-term investment the provides only capital gains.

*** START A BUSINESS ***

A home-based business may be great for you since you have time during the day.

Advantages - There are many ways to decrease the amount of taxes you will owe on our pension or any other household income through a home-based business.  For example, you can deduct part of your home expenses (utilities, property taxes, etc), as well as auto mileage and many other expenses that you would incur anyway.  Also, it's one additional way to make money, and could possibly grow into a large business.  

Disadvantages - I am not sure how disability affects whether or not you can have a home business.  There is always the possibility that the business doesn't do well.

Notes - If you want to buy into a proven system, try either a franchise or a network marketing business.  Businesses, when successful, provide cash flow.

                         REFERENCES

Here are a few websites if you want more information on any of the subjects above.

STOCKS & INDEX FUNDS
www.investopedia.com
www.fool.com
www.indexfunds.com
www.thestreet.com

ROTH IRA
www.investopedia.com
www.fidelity.com (go to the retirement or IRA section)
www.vanguard.com (go to the retirement or IRA section)

INVESTMENT & CASH FLOW CLUBS
http://en.wikipedia.org/wiki/Investment_club
http://www.richdad.com/community/cashflow_clubs/
www.BetterInvesting.org

FOREX
www.babypips.com
www.4xrules.com
www.forex.com

BONDS
www.savingsbonds.gov
www.investopedia.com
http://municipalbonds.com/
http://finance.yahoo.com/bonds

REAL ESTATE
http://www.youngmoney.com/investing/investing_basics/050316
http://www.forbes.com/real_estate.html

STARTING A BUSINESS
www.entrepreneur.com
www.inc.com
www.bplans.com
http://entrepreneurs.about.com

Happy Investing!