How to Spread Your Investment Dollars

This time we’re going to take your little wad of cash and begin the process of deciding where to invest it.

Investments with the least risk include:

• CDs
• Bank Accounts
• Money Market Accounts
• Money market funds
• Government Bonds/ Debt
• Treasury Notes
• Treasury Bills

Investments with a medium risk include:

• Real Estate Equity

• Mutual Funds
• Large/Small Cap Stocks
• High Income Bonds/Debt

Investments with the highest risk include:

• Options
• Futures
• Collectibles

If you’re investment capital is too low, you’ll not be able to have much of a percentage spread from low to high risk. If this is where you are, I would recommend sticking with lower risk investments until you build up a little more capital. However, as your dollars grow you might want to think about a 10/40/50 split (That’s 10% in high risk, 40% medium risk, and 50% low risk.) You can split the risk any way that’s comfortable for you.

How you spread your investment dollars will depend on your attitude as well as the market environment. If you are a fearful type person who’s going to lose sleep over risk, you’ll want to put your money in lower risk securities. If you are young, have a good income, and are comfortable with risk, you might well end up with a 30/60/10 spread. I keep mine at about 15/75/10 because that’s my comfort zone right now.

I’m self-employed so I don’t have the option of a 401k. If you hold down a job, your employer may offer a 401k plan. These are sweet in that employers often contribute to 401ks. What that means is that for every dollar you add to the fund, your employer will also add to it. Consider this, if you add $100 a month to a 401k and your employer contributes 40% matching funds, that’s a total of $140 a month. Plus, it’s tax deferred unless you withdraw the money before you reach 59 ½ years old. I call that a sweet deal. One thing to know is that when you turn 70 1/2, the IRS will require a minimum distribution for tax purposes. Be sure and check into your options if you are approaching 70 1/2 and have a 401K.

If you leave the job, you roll your 401k into an IRA (individual retirement account), and you’re back in business except of course, your ex-employer won’t continue contributing. Employers can be really narrow-minded that way.

If you are self-employed, your option is a tax deferred IRA (individual retirement account) or a ROTH IRA. These are still good deals, but not as sweet. Either type of retirement account or the 401k is going to give you choices into which fund(s) to invest. In the case of a 401k, your employer will give you the choice of various funds.

In an IRA, your investment choices will depend on whom you do business with. For instance, to invest in an IRA, you will need to open a brokerage account through your bank, savings and loan, credit union, mutual fund, or brokerage such as Fidelity or E-trade. I strongly suggest you do a lot of shopping and comparing fees and services before you open an account. The good thing is you can do it on the internet.

Once opened, you will then need to decide whether to invest your money in stocks, bonds, CDs, mutual funds, index funds, annuities, etc. Some trustees also offer less traditional investments such as Real Estate, Real Estate Investment Trusts (REITs), Futures, options, and U.S. minted gold and silver coins. Don’t panic, you don’t need to know everything about these investments to get started. You can begin with a simple mutual fund, index fund, or T-bill and expand as your comfort level, capital, and knowledge allows.

One final, but critical note here is you must at least make a return sufficient to cover the rate of inflation. On the net, you will find sites that will tell you that cash is your lowest risk option. I’m here to tell you that it’s a high risk because you know you’re going to lose money with cash. Currently you’re going to lose 3% a year due to inflation. What that means is you must have your money make at least 3% in order to break even. Got it?