The Secret to Smart Investing Decisions

Nearly everything you do on a regular basis is accomplished by following a process. You follow a certain sequence of steps to accomplish your objectives, like when you bake a cake or get ready to go to work in the morning.

Your level of success in any activity is largely dependent on the quality of your process and your ability to follow it accurately. Likewise, smart investment decisions require a solid decision-making process.

Try this sequence of steps before making your next investment decision:

1. Figure out if it’s the best use of your money. Paying off a credit card with a 22% interest rate is likely to result in a better return than any other financial investment.

* In most cases, investing is a smart move, but not always.

2. Consider whether the investment is congruent with your investing timeline. All investment goals should have a timeline. Does this potential investment match the deadline of your investment goal?

* It doesn’t make a lot of sense to invest in ultra-conservative short-term investments to achieve a goal that’s 20 years into the future.

3. Evaluate the level of risk. Is the risk level appropriate for your timeline and your comfort level?

4. Ensure you understand the investment. Some investments are extremely challenging for even financial professionals to fully grasp. Avoid being lured into investments that are beyond your current level of expertise.

* Albert Einstein once said that you may not truly understand something if you can’t explain it to your grandmother. Could you explain your investment to your grandmother and make her understand?

* It’s not easy to be successful with something you don’t understand. Seek advice from a financial expert and then try explaining your investment to someone with less financial sophistication than yourself to show you fully understand it.

* Do you know everything you need to know? Some investors have a habit of knowing 90% of what they need to know and then decide that’s ‘good enough’ because things get too tedious.

5. Ask yourself why you’re enamored with this investment. Warren Buffet once implied that if people were limited to ten investments, they would make their choices more carefully and end up extremely wealthy. Would you make this particular investment if you were limited to only ten?

* Are your investment choices based on valid reasons?
* Did your research verify your decision?
* Would you feel confident recommending this investment to a friend or family member?
* Are you guilty of any behavioral finance biases?

6. Assess what level of monitoring the investment will require. Some investments require little monitoring. However, many require constant attention.

* Are you prepared to do the necessary work and do you know how?
* Create a schedule for follow-up that’s appropriate for your investment.

7. Know when to get out of the investment. Every investor is well served by knowing when and how to get out of an investment. Know your exit strategy and the signs that it’s time to get out of an investment.

* What signs will you look for as a signal that it’s time to sell?
* Is your investment sensitive to interest rates?
* Will a change in technology render your company’s primary product or service obsolete?

Many people view investments like lottery tickets and they spend more time investigating a vacation spot than they do researching where their money is going.

Give your investments and your future the respect they deserve. Try this process before making your next investment decision. Using a good decision-making process will always give you better results.

Investing in Precious Metals: A Primer

For thousands of years, gold and silver have been admired and considered valuable. More recently, other metals like platinum have been added to the list.

The value of these metals tends to increase over time, so it’s usually a good idea to include precious metals in your portfolio, but how? Which ones should you buy and how should you invest in them?

Read on to learn more about precious metals and your options for investing in them. There are several ways to invest in platinum, gold, and silver.

Gold

Gold is easily the precious metal with the most trading activity. The laws of actual supply and demand do not largely affect the price of gold. There’s a lot of gold above ground that’s simply being hoarded, for lack of a better term. When these investors and hoarders get the urge to sell, the price drops.

When they feel like buying, the relatively small new supply is used up and the prices are driven higher. The price is largely a function of emotion or sentiment.

Factors that increase the desire to own gold:

* Global financial concerns. When the population largely considers banks to be unstable, gold is frequently used to store wealth.

* Inflation. Gold has history of maintaining its value during inflationary times. When inflation is increasing, it can be a good time to invest in precious metals.

* War and political issues. These issues have also increased the amount of gold hoarding. An entire life’s savings can be made into a very small and portable form.

Silver

Silver has much greater industrial use than gold, so its price is a function of both its current desirability as a means to store wealth and its use in industry. Because of this, the price of silver fluctuates more than the price of gold.

Silver is used in batteries, microcircuits, superconductors, and more. At one time, the photography industry used a lot of silver, but digital cameras have almost completely eliminated that demand.

Platinum

Platinum is much rarer than gold or silver, so it tends to cost more than either, but this isn’t always true. Like silver, platinum is used in industry. The main use is in automobile catalytic converters. Because of this, the auto industry largely determines the price of platinum through the level of auto sales and production.

Platinum is the most volatile of the precious metals.

Options for Investing

1. ETFs. Exchange traded funds offer a very simple way to invest in precious metals without have to store the metals yourself. You can think of ETFs like mutual funds that own and invest in precious metals.

2. Mutual Funds and stocks. There are plenty of options here, the most common being mining operations. The price of mining shares tends to move with the price of the corresponding precious metal.

3. Futures and options. If you want to make big bets on precious metals, this is the ticket. These derivative products offer the opportunity for big profits and big losses.

4. Bullion. This includes coins and bars. You’ll need a safe place to store it, but if you’re expecting the worst, this is the best option. However, coins and bars aren’t as liquid as the other options.

5. Certificates. These provide all the benefits of bullion without having to store it. But don’t expect to trade your gold certificates for anything of value if there’s a global economic disaster.

Precious metals are worth consideration for every investor. They offer excellent protection against inflation. They also have a very low – and even negative – correlation to many other investments like stocks and bonds.

Even a small investment in precious metals can reduce the volatility and risk in your portfolio. Look into precious metal investing and see if it makes sense for you.

Common Real Estate Investing Mistakes

Although real estate may seem like a sure bet for anyone, many investors make the same few mistakes. Eliminate these errors from your investing activities and you’ll be well on your way to accumulating the wealth you desire.

Avoid These Real Estate Investing Mistakes

1. Poor research. Most of us do a lot of research when we plan our vacations or purchase a new television. If you were buying one that was worth 100k, you can bet you’d do even more research! Well, you should be doing that when you purchase a piece of real estate, too.

2. Inadequate financing. Real estate investors frequently like to wheel and deal, and their deals can have a lot of moving parts. Balloon payments, interest-only payments, owner financing, subject-to, and many others are commonplace.

* To make a deal happen, we can get carried away doing everything in our power. Getting a great price doesn’t always justify the deal if the financing is inadequate. Are you really sure that you can unload the property or get other financing before that balloon payment comes due?

3. Trying to do everything yourself. Though every real estate investor attempts this at one time or another, you have little chance at success all by yourself. A great investor will have, at a minimum, a real estate agent, attorney, title company, inspector, handyman, and insurance agent – all on speed dial.

* You may not always need them, but they should already be in place, and you shouldn’t hesitate to call them if you do want their services. Use your experts to your full advantage.

4. Paying too much. This one is certainly related to doing enough research. Real estate deals primarily sink or swim based on price. If you pay too much, not much can be done to rectify the situation.

* Beginning investors are more likely to mentally fudge the numbers a little bit to make a deal happen. But if the repairs run high, and the price they can sell for is lower than expected, then overpaying in the first place can be disastrous. Do your research and your math and stick to your numbers.

5. Not estimating expenses accurately. This is similar to paying too much. Many investors will look at repairs and think to themselves, “Everyone is saying it will take $20,000 to fix, but I’m sure I can get it done for $14,000.” But what if it really takes $23,500? That’s part of the reason getting the property at the right price is so important.

* The other aspect of this mistake is not accounting for all expenses. The costs of landscaping, lawn mowing, insurance, utilities, property taxes, and new appliances can really add up in a hurry. Be realistic with your repair planning and take careful notes of all your possible expenses.

Real estate investing is a relatively simple business, but mistakes can create massive challenges in a hurry.

Every seasoned investor has made all of these mistakes. The best investors just make them less often than everyone else. In any housing market, there are moneymaking opportunities, so don’t let these mistakes slow you down!

Investing and Tax Considerations

Managing the tax implications is a hallmark of good investing. But let’s face it, investing can be complicated and taxes are always complicated. Putting them both together doesn’t make it any easier. This article covers the basics, so you can keep as much of your investment earnings as possible.

Tax efficiency is simply how much of an investment’s return still remains after all the tax obligations have been taken care of.

A good general rule to remember is that the more an investment’s return is dependent on income rather than an increase in share price, the worse the tax burden usually is, or the less tax efficient it is.

Taxable or Non-Taxable

Investment accounts are classified as either taxable or non-taxable. If an account is taxable, then the taxes must be paid on investment income in the same year in which it is received. This would include bank accounts, money market mutual funds, and your basic individual or joint investment account.

Non-taxable accounts are free from taxes as long as the money stays in the account. When you start taking money out, your tax liabilities kick in. This would include any type of retirement account, like your 401(k) and IRA.

A good rule to follow is to use your non-taxable accounts for the less efficient investments and the taxable accounts for the more efficient investments.

The Effect of Your Tax Bracket

If you’re going to invest with taxes in mind, be aware of your tax bracket. You must determine your marginal income tax bracket and also whether or not you’re subject to the alternative minimum tax. The higher your tax bracket, the more important it is to be in tax efficient investments.

Current Income versus Capital Gains

There are also differences between taxes on current income and taxes on capital gains. Any current income is usually taxed at your tax bracket rate.

Capital gains are categorized as either short-term or long-term. Short-term investments are those held less than a year; long-term would be anything longer than a year. Typically, short-term gains are taxed as income and long-term gains are at the preferential rate.

Tax Treatment for Typical Investments

Consider these tax treatments for the investments you’re considering:
* Dividends are normally taxed at a lower preferential rate. So dividends are likely to be a better for an investor in a higher tax bracket than for one in a lower bracket.

* Bonds provide interest and are usually taxed at the marginal (income tax bracket) rate. This would not be a tax efficient investment for someone in a higher tax bracket.

* The gains realized from stocks that are held for over a year and then sold would be taxed at the preferential rate.

* Some investments with poor tax efficiency would include junk bonds and preferred stock. This is due to the high interest received and the high, fixed dividends that are received, respectively.

* High tax efficiency investments would include stocks and municipal bonds. Municipal bonds are not taxed at the federal level and the yields are quite low. Stocks are typically held for more than a year, so the gains are taxed at the preferential rate. Both can be held in retirement accounts, which would make them even more tax efficient.

Minimizing the tax burden on investments is well within the reach of any investor, even beginners. Simply take a look at your marginal tax bracket and the preferential tax rate and make a plan. If your marginal tax rate is relatively low, you have a lot more flexibility. If it is high, then more planning will really pay off.