“How should I invest $x?” Under a certain amount, my answer will be the same. Focus on stocks, bonds, and precious metals, and use a low cost broker like Motif Investing for stock purchases. Why? $1,000 – $10,000 isn’t really all that much money when it comes to stocks. If you’re paying $9.95 per transaction, buying one security for $1,000 is going to cost you 1%. Putting $1,000 each into 10 stocks will give you the same result.
One of the easiest ways to invest is by getting into the stock market. In fact, they’re such a simple investment vehicle, I even recommend them for accessing precious metals, which I’ll talk about later. In addition, so long as you are buying and holding, rather than day trading, the stock market, over the long run, is relatively low risk, if you’re properly diversified.
With Motif Investing you can purchase a collection of 30 stocks, called a motif, for a single fee of $9.95. You can also sell or restructure that same Motif for the same price. That’s really quite useful. It means you can pick and choose a fair number of stocks, properly diversify, and not have to take a huge hit. In fact, it even reduces the problem of over-diversification, which is primarily that it costs more to handle 30 stocks, usually, than 20. It doesn’t however eliminate the added complexity of researching an addition stocks however.
They now also offer Motif Blue, which has a few tiers. I use the Unlimited Tier because it provides unlimited next market open trades for free. I can make as many trades as I want, as long as I don’t need to worry about getting the exact price. This is perfect for anyone who wants to frequently put in smaller amounts of money over the month.
When selecting positions to diversify your portfolio, you want to pick companies which are either unrelated to each other, or which are generally going to complement each other. Here’s an explanation. Suppose you want to diversify and so you buy stocks in manufacturing and energy. But, when manufacturing is weak, energy demand usually declines. This means your entire portfolio is likely to decline. So instead, it might be better to select manufacturing and beer. When manufacturing drops, and people are out of jobs, they still manage to drink. In fact, beer and related industries tend to do pretty well during recessions.
Unfortunately, things are getting increasingly risky in the United States, due to all of the manipulation of the economy. The stock market is booming, but that boom seems to be a bit artificial. In fact, there is some indication that we’re about to hit a major downturn in the market. As such, I suggest making sure that you are not just diversified across industries, but engage in global diversification. This can be done by either including an already diversified global ETF or by purchasing foreign stock packages, traded on the US market, known as ADRs.
Precious metals are often purchased as a hedge against economic downturns. They’re seen as safeh havens with relatively steady value. However, the real value of precious metals is tied to a large number of factors, and also varies with the metal. Silver and platinum, for instance, both have greater industrial importance than gold, but even gold is used in electrical equipment because of its superior conductance and resistance to rusting. Recently, almost all commodities have also been hard hit by the relatively strong (thanks to government manipulation) dollar. So keep all of these things in mind when looking to invest in precious metals.
With that out of the way, let’s talk about three of the biggest difficulties relating to precious metals investing. The first is that there is often a high premium for investment. Unless you are purchasing huge contracts, you are not going to get spot price. The second problem is that precious metals take up space, especially if you want to purchase a lot. The third problem is liquidity. You can’t buy things with gold or silver coins. You have to convert them to cash first, and if you’re going to a dealer, you’re only going to get about 80% – 90% of the spot price! There are some options to reduce these problems however.
First, instead of buying the precious metals themselves, you can purchase stock in companies which handle precious metals. It’s pretty easy to sell publicly traded stocks and other related securities. Plus, it’s virtual, so you don’t have to worry about holding the metal! There are a few options here.
One option is to buy mining stock. There are a large number of mining stocks from which we can choose.
ETFs and Mutual Funds
Another option is to purchase ETFs or mutual funds which track precious metal prices.
The final option is to purchase stock in precious metal streaming companies. Precious metal streaming is kind of like a hybrid between a loan and a futures contract. Essentially a company will provide a sum of money to a mining company, and in return, the streaming company is able to buy a certain amount of precious metal from the mine, for a certain amount of time, at greatly reduced prices.
Precious Metals IRA
A precious metal IRA might be the next best thing to holding onto the physical metal. The only downside is that it’s an IRA and therefore you cannot access it until retirement, without taking a penalty. The upside however is that you have some great savings in terms of tax. Since precious metals are treated as commodities, rather than as currency, you’re taxed on the increase in value from the time you buy the metal until the time you sell it. If you buy $10,000 worth of gold, and over time that gold increases in value to $15,000, you’ll be taxed on $5,000.
A precious metals IRA can help reduce some of your tax burden in the exact same way that a normal IRA would. One option is Goldco, which is A+ rated by the BBB and receives impressively good reviews.
But some of the same properties of precious metals stock discussed above, such as the fact that you do not actually hold any of the metal yourself, is the same reason why people shy away from these securities.
If you do want to invest in the metal itself, go for bullion. Many coins are priced well over spot price. You’re never going to get down to spot price when you buy, however there are coins which are priced based on collector’s value, rather than just on the value of the metal itself. This is called numismatic value. It can certainly be nice to have numismatic coins in your collection, but they don’t act as a good hedge against economic downturns.
Bonds are relatively low risk and high return investments. A bond is a debt vehicle. Companies and governments issue bonds in order to raise capital and pay interest on the bond. It is not equity, unlike stocks, it is pure debt. Corporate bonds can carry substantial risk, especially when the company is taking on a lot of debt. It’s a good idea to check the rating of the bond before purchasing it. Municipal bonds offer lower risk because they’re issued by local governments. The lowest risk bond is a treasury bond. They’re issued by the US government. You can also purchase bonds from foreign governments. However, you might want to stay away from Greece’s debt for a while.
Motif Investing doesn’t provide an option for purchasing bonds, but TDAmeritrade does. You can also purchase treasury bonds from Treasury Direct. US treasury bonds are incredibly low risk because the United States economy is so large and because the US can print more money to cover the debt. Of course, this can backfire, and quite frankly, I’m becoming increasingly concerned with the direction our economy is headed. Also, the interest rates on bonds are still relatively low, thanks to the Fed’s policies.
Disclaimer: I am not a professional investment adviser. I offer no warranty on this information. Any risk taken is your own.