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A dollar stuck at the back of a drawer will be worth three pennies less in a year’s time. In ten years, that dollar will be worth $0.74, but if that dollar were invested and earned a 3% return, it would maintain its buying power. If you want to stay even with inflation, you must invest.
We’ve carefully pieced together some of the best ways to put your money to work. Add a dash of patience and passion, and you’ll reap the rewards.
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Method 1: You Can Loan It Out Using Bonds
Want a safe investment with predictable returns? Then bonds may be for you. Treasury inflation-protected securities (TIPS) are U.S. Treasuries designed to maintain buying power. The principal value of TIPS increases with inflation and decreases with deflation as measured by the Consumer Price Index (CPI).
Ten-year TIPS now offer a yield of 0.910%, which is applied to the adjusted principal so that interest payments adjust with inflation. If your only concern is not losing, you could accomplish that simply by buying TIPS.
If you need a higher interest rate without regard for inflation, the benchmark Ten-Year Treasury Bond pays 3.19%, near its highest in seven years. But if inflation and interest rates continue to rise, you would see a drop in account statement value.
A bond purchased from the U.S. Treasury department is a $1,000 loan to the U.S. Government with a guaranteed return of principal invested and semiannual interest payments. A higher return is available to lend to corporations. For example, the Walmart (WMT) bond that matures April 5, 2027 is priced to yield 3.82% and is rated Aa2 by Moody’s.
The B3 rated Tesla (TSLA) bonds, due August 15, 2025 with a 5.3% fixed coupon rate, are selling at $892.80 per $1,000 bond and net 7.37% to maturity. To capture the expected return, all you have to do is sit back and allow Tesla to stay in business.
Method 2: Own Part of a Company
Not in the traditional sense. Look to appreciating assets for less certain returns on investment but much better performance.
Gold supply is limited by mining capacity, so its price rises over time with its increased rarity. It rises in value with inflation and appreciates more in times of geopolitical discord and military conflict. However, gold has no earnings and pays no dividends or interest.
Real estate is limited to the supply available on this increasingly populated planet. It must go up in value, but which real estate and where? Also, once a real estate investment has been made, that money is tied up in that property and cannot be used for other purposes without borrowing against it. Real estate does not come in small chunks.
- Shares of common stocks of corporations rise with earnings increases and at an average rate more rapid than any other investible asset. Shares of common stocks allow an individual investor to own a part of the income stream that a company produces as well as participate in any dividend declarations. Common stocks:
- Are liquid and trades settle quickly.
- Can be used as collateral for borrowing on margin.
- Qualify as assets when applying for a real estate or business loan.
- Allow an individual investor access to ownership of multinational corporations.
The total return for the Standard and Poor’s 500 Index has been 14% over the last ten years and over 11% for the last 40 years. The numbers have been worse for segments of time within those periods, but bonds cannot compare with stocks for long-term return when measured on a pure percentage basis without factoring risk.
Method 3: Let Your Interests Guide You
A coffee-lover who bought Starbucks stock in 1992 because the coffee was good did well. A cinema buff who bought MoviePass, didn’t fare well at all.
The risk of entering the market at exactly the wrong time can be mitigated by dollar-cost averaging. Regularly buy the same dollar amount of an equity investment can mitigate timing risk. A fixed monthly investment buys more shares when the stock is cheap and fewer shares when it is expensive, which lowers the average cost of all shares.
Starbucks performance over time
MoviePass performance over time
If you’re interested in purchasing stocks in companies that you personally believe in, whether it is their core values, mission, product, or just think they’ll be profitable, you can do so with a self-directed trading account from a brokerage. Here are a few of Benzinga’s top picks from our 2019 Best Online Stock Trading Brokerages.
And, Remember the Three Investing Must-Dos
1. Pay Attention to Timing
Timing does not matter if you’re persistent; all that matters is that the process continues. On the other hand, timing matters if you’re patient and you wait until shares go on sale and then stocks up. If you’re passionate about an opportunity, you can be well-informed about that one company, but also blind to the whims of the market.
2. Choose a Reputable Firm
Different brokerages have different rates for different levels of service. There’s good news, though. Commission rates have shrunk, some have disappeared, and most have less effect on the potential total return of a stock purchase. You can find cheap commissions from affordable online brokerages and robo advisors.
3. Learn About Risk and Return
The Capital Asset Pricing Model (CAPM) describes the relationship between risk and return. Using beta (β) to represent volatility as risk, expected returns for individual securities can be estimated.
Expected Return = Risk Free Return + β (Market Return – Risk Free Return)
Risk-Free Return = Ten Year Treasury (3.2%)
Market Return = S&P 500 (11%)
|Company Name||Symbol||Price||EPS||P/E||Dividend||Div. Rate||Beta (β)||CAPM %|
Know That Sometimes, It Comes Down to Luck
Unless you’re ready to make a commitment of ten years or more, Lady Luck can have a powerful influence on investment returns. Financial research by Nobel laureate Eugene Fama and Dartmouth professor Ken French has shown that timing of an investment has a significant effect on investment results on a ten-year-or-less investment horizon.
The combination of passion, patience, and persistence, as well as the investment of time, energy and money, can do wonders for your portfolio. Tap into all of Benzinga’s investing resources for help with everything from bonds to penny stocks.
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