It’s a question asked by all investors old and new: What should I be putting my hard earning money into so that it grows and matures into 1X, 2X, 10X, or even 100X what I started with. Everyone from banks and private equity firms to individuals like yourself ask that question every day. There are certainly never any shortages of people trying to start businesses or investment products on full page ads in glossy magazines. But sometimes in all the confusion we get lost in knowing which of them make good investments to go with and won’t totally lose all the money we put into them.
If you’re feeling overwhelmed by all the options that are out there, than you can take comfort in knowing that most of the best investments are found using simple common sense. Here’s a few things you can look for while trying to find ones that fit your comfort level.
What Are Good Investments?
Obviously our goal is always to put our money into things that will increase our overall net worth. Some people even have bigger plans of using the money they get from their investments to create passive income streams that they might use to replace their employment paychecks and eventually live off of.
Despite these very exciting and admirable goals, it helps to first form a foundation for what good investments are in the first place. Here we can define them as follows:
A good investment is one that returns both our original investment (called the principal) as well as some percentage above it (called the capital gain) in a legal and ethical way within a reasonable amount of time.
I have to caveat “legal and ethical” because there are certainly lots of options of seedy ways out there to make money, and they should never be considered.
Your Concept of “Good” Depends on Risk:
So while we want our investments to go up in value, the reality is that not all investments do. There is undoubtedly always some relationship between risk and return when we invest.
Right off the bat you forget about the phony exotic hot stock tips or the shady commercial real estate offerings. But even in that margin of relatively normal or safe investments, there will be varying levels of comfort associated with certain investments. For example:
- I might think that a stock is a good investment and am comfortable investing in one. But you might be scared to death of them and want nothing to do with them.
- You might think rental houses are great for investing. I might have heard a terrible horror story with one and pass them up every time.
Therefore, to really determine what makes a good investment, you have to know your own financial comfort and how much risk you’re willing to take on.
- How badly do I need my principal investment back and how soon?
- How reliable do I need the returns from this investment to be? Will I be living off of them or using them to reinvest back into the fund?
- What if the investment goes down in value? Can I stomach it?
I have made dozens of investments over years trying to mitigate as much risk as possible while reaching the maximum returns I could make. Here are my recommendations for what I consider to be good and relatively safe investments:
A lot of people discourage you to stay away from stocks. That’s because it’s very easy to get all excited with all the Wall Street hype about a trendy stock, invest your money into it, and then lose it all overnight!
What a lot of people forget about when it comes to stocks is that there are a ton of really great companies out there, and they’re not nearly as risky as you’d think. Think about companies like Johnson and Johnson, General Electric, and AT&T. These are all businesses that you know and love. They are huge companies that have been around a long time and probably will continue to be.
Another great thing about large companies? A lot of them pay dividends! The great thing about dividend stocks is that they pay you a guaranteed rate of income on top of what the stock earns. So if your stock earns a 4% dividend and goes up by 8% that year, you really make 12%. That stock can also serve as a buffer if you lose money. If the stock earns a 4% dividend but loses 8%, then you are only down 4% which is a lot better than your peers.
So if you’re interesting in creating passive income from stocks, the semi-guarantee of dividends may be attractive. Just make sure you pick companies that have strong financial backing and health.
If you’d like to own ALL of the major US stocks just like the ones I’m describing above but don’t really have the time or energy to do so, it’s actually really simple to do. Just invest in a mutual fund that tracks the S&P 500 market index. This is called investing in an index fund.
Vanguard investment firm founder John Bogle is a huge promoter of index funds as being not just good investments, but possibly one of the best ones available! His argument: Investors as a whole cannot beat the average market return when they try to invest on their own. So by simply following it they can passively earn the market average.
The Vanguard 500 Index Fund is about one of the cheapest funds available in the market period. For an expense ratio of 0.05%, you basically can own a piece of the entire stock market at $5 for every $10,000 invested. Not too bad!
Although index funds traditionally pay lower dividends than other stock investments, you could potentially create a stream of passive income from the capital gains they earn each year.
If stocks really turn you off, a safer place you can turn for great investments are cash products like certificates of deposit (CD’s) and money market funds. One of my favorite places to look are reputable online banks like Ally. Though interest rates are low now, they will someday return back to post Recession levels delivering safe and sound guaranteed returns. And when they do, you can use a technique called CD-laddering to create passive income for yourself from the interest that they earn.
If you’d like something a little different than banking or the stock market to make some money, hit the Internet. Blogging has been a good investment for me now that I’ve been doing it for a little while. For less than $100 I can start my own website, connect with other people, and market advertising space to those who need it. Though it might take a lot of work and learning at first, the potential to generate an $500 to $5,000 per month in extra income might be well worth the effort.
Though I don’t personally do anything with real estate, there are countless promoters of rental homes as being great investments. People will always need a place to live, and if you own a property you can rent out to them, then you have the potential to bring in a couple extra hundred dollars each month. If you have more than one property, that could equal out to a few extra thousand each month!
Believe it or not you probably have a few good investments in unusual places if you’re willing to look for them. For example, would you consider:
- Sports Memorabilia
- Comic Books
Though they might not have the pizzazz of the stock market or intrigue of a new business, people do in fact find these items, turn them around to sellers who are willing to pay top dollar, and then collect a handsome profit in the process. Popular shows like Storage Wars have also gotten people excited about going “treasure hunts” for the luck of finding such rare items. As you can guess, it helps to know what you’re looking for. And if you do, the spread between what you paid and what someone is willing to pay you can be a huge residual income boost for you.
Only Invest In What You Understand:
The bottom line to any investment is this:
Keep it simple and only invest in what you understand.
If you don’t know stocks or understand them, then stay away. If you don’t feel comfortable with real estate, then forget it. These aren’t going to be very good investments for you. But understand they have the potential to be if you’re willing to educate yourself and put forth the effort to recognize what good ones are. You will find there is a direct correlation with knowledge and experience when it comes to where and what to do with your money.
Images courtesy of FreeDigitalPhotos.net
The post What Are Some Good Investments for Generating Passive Income? appeared first on Great Passive Income Ideas.