The US is experiencing an amazing period of interest rates with Ben Bernanke pledging to keep them almost at 0% until 2014.

So how can we best take advantage of this amazing period in time, without being too exposed to a market where things could go upward or pear-shaped very quickly?

Consider Household Investment

A quick glance through the business pages is a confusing affair. On page two, it’s time to build a bunker because the end of the world is coming. Three pages later, it’s all positive signs of a recovering economy.

For myself, I have no inclination to gamble on what the world’s economy may or may not do. Sticking to what I know are sound financial principals seems to me to be the most secure way of staying financially secure.

That said, low interest rates are usually suggested by experts as a good time to consider buying a house or investment property. Setting your loan to a fixed interest rate could mean you are ahead of the game in years to come, while others are paying a much higher variable rate.

In Australia, the housing slump also means you’ll be buying while the market is lower. Talk to a financial advisor about whether investing now is a good financial move for you. It’s a safer bet if you’re considering property as a long-term investment and aren’t looking to change in the near future.

Pay Off Credit Card Debt

At this point in time, if you’re deciding between paying off your credit card and putting money into a savings account, then it’s a good time to be paying off your highest interest credit card.

Firstly, there will be no decrease in the interest on your credit card and, secondly, your savings account will be earning very little interest, so you’ll be better off in the long term to make a dent in the credit card bill. It’s always best to be paying off your card after you’ve set up an emergency fund.

Refinancing

The writer at MSN Money suggests that it’s worthwhile considering refinancing your home at the current lower rate of interest. Interestingly, they also suggest refinancing to a shorter-term loan, say from 30 years to 15. The advantage they suggest is the years you will gain after you’ve finished paying off your mortgage to when you retire, allowing you to save a far more significant amount of money for retirement.

You’ll also save money on interest repayments.

Review Investments

As if we haven’t all been looking at our investments in the past couple of months, what with the state of things in Europe. Now is a time to diversify to alleviate some measure of risk.

Whatever your inclination, it is definitely worthwhile discussing your decisions with financial professionals and avoiding making too many changes, increasing your fees and chances to make kneejerk, panic decisions.

For me, I have dabbled a few times in the share market and have decided I am a terrible investor. My appetite for risk is rather small; meaning the first site of a loss scares the hell out of me. I end up monitoring the market daily; looking at how much money I have lost or gained in a single day and normally end up taking a loss to secure the remaining dollars I have invested back into my pockets.

According to experts, this is the wrong way to approach an investment in shares. However after having some time to think this over, I am now doubting whether I am actually a bad investor or simply part of the norm with reasonable concerns over investing my money in the share market.
Here is why;

Most advisors tend to tell you to focus on the long term

Just about every financial institution will tell you to focus on the long term when investing in shares. They will also go on to draw comparisons between someone who invested in shares compared to someone who opted for safer investments (such as term deposits, property or high interest savings accounts).

Though these statistics become compelling to show you that over the long term shares have outperformed cash – it still leaves me worried. Who in their right mind is happy to let their cash go up and down (often drastically) and still act like they aren’t remotely worried?

I see it going up and down daily and think, ‘what if I lost it all?’ – the thought of losing my money or having sleepless nights while it is in the market gets me very concerned. This shows my tolerance to risk is low, ‘each to their own’ some will say.

The disclaimer in the advice given is contradictory to the above

Now although the statistics provided by advisors show shares as a good long term investment, these statistics are based on past performance.
The disclaimer that you will see in emails from advisors or institutions trying to get you into the market, clearly states: “Past performance is not an indication of future returns”.

This means that the market could go anywhere. It in all honesty is uncharted territory and just because it performed well or bad in the past – has no actually ground to show that history will repeat itself. Instead history is written as we go when it comes to investing in shares.

My risk tolerance indicates I should not be investing in shares

My tolerance for risk is clearly low. I hate the idea of losing money, even if it is temporarily. This is likely due to the fact that most of my money I have to invest, I will likely need at some point and cannot afford to lock it into the market for a 10-15 year period.

Who is to say that the boom we saw in the early 90’s on the stock market will happen again? These past returns drive people in the present to invest – which is a bad basis for making decisions.

So unless you have research and ideas about the returns of a company you wish to invest in, the mum and dad investors tend to be led by past performance which may or may not yield a good result.

So am I really a bad investor? Or am I just a realist with a low threshold to risk. I say the latter if I may say so myself.

What Does ‘Ethical’ Investing Mean?

Ethical investing is approached in two ways. It seeks out companies that have a positive effect on social and environmental spheres, and avoids those that have a negative effect. The terms, of course, are wishy washy. Often, funds that suggest themselves as ‘sustainable’ can still have ties to companies we don’t necessarily view within that category. As mentioned in the fantastic Choice article on this topic, sometimes ‘sustainable’ investments can include major mining companies, the explanation being that the money is to be directed towards nuclear research. Other times there may be investment in major companies, with links to gambling. These investments are made as the companies are suitably mainstream and are generally safe investments. While ‘sustainable’ and ‘ethical’ may be terms used interchangeably, it’s more common for ethical funds to be genuine in avoiding companies with negative effects. Sometimes sustainable funds will choose the best of the bad lot; allowing them to invest in every industry (and therefore diversify) but choose the companies within the industry that have the best sustainable record.

What Does That Mean To Us As Investors?

Because of the confusion of terms, it can be a blurred world when we begin aiming to invest ethically. There are a couple of ways you can go about it. You can invest your super in an ethical super fund, and the Choice article has a great list of options. You can call your current super provider and discuss with them your options within the fund. Should you be investing beyond super, you can go through an ethical managed fund. Or you can choose to research yourself and invest in companies you feel comply to ethical practices.

What ethical practices means is, obviously, fairly subjective. One major ethical managed fund is Christian, and therefore doesn’t invest in anything to do with child labour, prostitution, gambling, abortion, or stem-cell research. Everyone will feel differently about all of those issues, so choose funds that match your value systems, looking beyond the simple term ‘ethical’. You may also not care too much about the whole ethical gambit. Perhaps it’s about the importance of sustainable business, which you feel is achieved through sustainable practices. For whatever reason you make the choice to invest ethically, there are some great further resources online at the Ethical Investment Association website.

Extra Costs

As with buying any property, the big number you’re aiming to save needs to be well over your deposit amount as there are extra costs in purchasing a property that need to be taken into account. Stamp duty is calculated according to the worth of your property, while registration fees and mortgage application fees can add on extra costs. If you’re borrowing more than 80% of the property’s value, you will also be obliged to pay a loan mortgage insurance. To finish it all off, there are conveyancing costs. While conveyancers are cheaper, one website I read suggested using solicitors as they’re backed by heftier qualifications should things get a wee bit dicey.

Baby Steps

While it’s exciting to think about getting a foothold in the property market and starting to make some big investments, there are some important steps that can’t be overlooked throughout the process. The ground work now is essential to your enduring financial stability. To begin with, bring in some expert assistance about how best to structure your finances and searching out the best loan for your current scenario. Bring in a surveyor to evaluate the property and its depreciation over the period your intend to keep it. If you don’t have an accountant, now is the time to find a good one to maximise the tax benefit of your investment property and making sure your records are well-maintained.

Caveats

There’s plenty of expert advice online, and even better information to be had from a good real estate agent or financial advisor. One website mentioned the big whopper of a caveat when it comes to investment properties- they don’t look after themselves. Land, apartment, houses require a lot of ongoing investment. Ideally your rent will keep pace with inflation, and eventually you will become neutrally-geared (i.e. your rent covers your mortgage) or positively geared (your net exceeds your mortgage). Don’t forget extra costs like water rates and strata fees, and the likelihood that, at some point, your tenant is going to need something fixed.

Benefits

Benefits are in the short, middle and long-term. The short term benefits are mostly tax related, including negative gearing and depreciation. The mid-term benefits are based in the increase in rent due to inflation and increases in the rental market price. All things going well, and provided you can invest for a long enough period of time, the long-term benefit is capital growth.

Art

I don’t particularly have the money lying around for a good quality Van Gogh, but investing in art is an exciting and potentially solid investment. Research is crucial, and emotions get to come to the fore in this area. If it’s a piece of work you think is special, then that’s a factor in your decision. Commentators suggest that it’s more likely you’ll have the money to invest in up-and-comers, but if the composition and perspective is good, and it moves you, you could be onto a winner.

Sports Memorabilia

It’s a pretty fun way to invest some money; learn who’s on the way up and invest some money in their memorabilia. Get your hands on a couple of things that have been signed, across a couple of sports. Like any investment, it’s a game of chance, lots of Next Big Things have unremarkable careers. But if sport is your thing, play to your strength and do some research on investing in the area,

Comic Books

Comics are now at a level of cool previously unimagined. Like any serious collectors, the idea of a complete set of a comic books is the Holy Grail, so if you can get your hands on some rare copies, you might have a chance of making some moula. The best part is that it could be lurking anywhere; a garage sale, a second hand bookstore, your mum’s house. Keep your eyes open and ears to the ground.

Wine

A serious business. Experts suggest investing in a top-end wine with a good vintage. Storing it properly is imperative, you’ll need to make an initial investment in the cellar. Start talking to people, find out what’s looking hot over the next couple of years and buy a couple when they’re still cheap. After all, no one liked Grange when it first appeared. And if you can’t sell it on, you’ll always have a great bottle of wine to drink.

Rare Books

First editions or signed copies can be a great investment. Stick to what interests you, and buy them in good condition. It’s pretty difficult to predict what’s going to become a valued book over the next couple of decades, but even contemporary authors can command a certain price. It’s a limited market, but I could spend hours thinking about Berkelouw’s rare book collection and call it bliss. My favourite investment strategy to dwell on.

Instruments

A great quality instrument from a good provider could be a great investment. An instrument that a really famous person plays is an even better investment. One of the early Les Pauls or Strats sell for a small fortune, and there are a lot of musical collectors out there. Just don’t headbang and ding it, unless you’re immensely famous.

In reality, just like wine, a variety of investment methods is the smartest approach. And while personal finance writers will often look at diversification purely within a portfolio, this article takes it to include other investment methods. There are some classic mistakes in diversifying, and some great benefits, so read on for some tips and tricks.

Just For The Risk-Averse?

Diversification is generally referred to as a risk management strategy. Research shows that a diversified portfolio achieves average returns and protects against the ups and downs of the market. Commentators often point out that some concentration of assets is necessary if any serious gains are to be made, and peppering your assets everywhere isn’t going to allow you to get too far ahead of the game. For instance, diversification is suggested as a good approach for retirees, who need a safe portfolio that will create reasonable returns. Less diversification and more risk is then suggested as a possibility for a young investor.

It’s perfectly good advice, especially if you’re looking to crack it big time and willing to risk some money to get there. My approach is geared towards solid personal finance; I’m less concerned with making big money quick and more interested in solid gains and good investment over a long period of time. For that approach, I think diversification is a great strategy for anyone looking for financial stability.

Classic Mistakes

That said, diversification shouldn’t mean owning a hundred different shares, investing in a couple of local businesses, buying one-eighth of a house and putting fifty bucks in the bank. Spreading yourself too thinly is only going to earn you a lot of fees and deny you any access to solid gains. This is especially important to remember if you have a solid performer who has gradually become a large proportion of your portfolio; taking money out of it and putting it into something that performs less well isn’t diversification, it’s just action for the sake of action.

The writer at Motley Fool also suggests it’s crucial to look at the risk you own. It’s not going to make any difference how many companies you have shares in, if they’re all exposed to the same risk. You might have shares in twenty different oil companies, it’s won’t change a thing when oil runs out.

Across Asset Classes

Diversifying across assets classes protects you against the vagaries of the market, even though it will reduce the expected returns your investments will make. While shares are one asset class, investing in property and bonds will appreciate at a different rate, while cash and fixed interest investments remain unaffected by the market and are a great counterpoint to the highs and lows your other assets may experience.

It’s not just about what helps you sleep at night, it’s about preparing for the long-term. To avoid some rookie mistakes, it’s best to discuss this with a professional and continue to revisit your allocation annually.

The Components Of Risk

High risk is a result of high probability and significant consequences. The example in Financial Connections is apt; there is high probability you will step on a crack today, but the consequences are light. On the other end of the spectrum, your chances of being hit by lightning are slim but the consequences are not delightful. Big risk is linking high probability with significant negative consequences. This is what we want to avoid. Putting a lot of money in real estate you know nothing about and could be worth very little does have the possibility of yielding a big return. There is a higher probability that significant loss will ensue.

Risk And Reward

The writer of the Financial Connections article suggests that high risk might be essential to great rewards, but it is not the key to great rewards. Certainly it is true that high risk does not mean great rewards; there are a million people in the world you have invested in the ‘next big thing’ that can testify to it. I would also suggest that high risk is not essential to great rewards. For myself, personally (and I should probably mention that my financial personality does not tend towards the high risk end of things), I would prefer to slowly and steadily save money rather than risk and make a bonanza. It might make me less well-off in the long run, but it’s the approach that matches my financial personality.

Risk Is Relative

Risk is not a clear-cut thing. For instance, you might think putting all your money in a term deposit is the safest thing to do with it, and in the short term, you might be right. But the chance of the term deposit keeping up with inflation is minimal. So while you might think stocks are risky, some experts suggest if you’ve varied your portfolio enough and keep it over a long-time, it might be a safer way to inflation-proof your money.

Controlling The Risk

Risk can’t be controlled to the enth degree. The best approach is to keep calm and maintain a steady course. Think beyond the short-term; your investments should not be about what’s happening in today’s stock market, but about long-term growth and diversification. A knee-jerk reaction could lose you significant money. Understand your own financial personality and risk tolerance, and set up your investments from there.

The Sea Change

I moved away from the city and back to my sleepy hometown just after finishing university. It felt like, and at times still does, a counter-intuitive step, leaving all my friends and the life I had built there. But I wanted to be a musician and some tough decisions needed to be made in order to do that. I moved back to my hometown and because of cost of living was so dramatically lower, I could afford to follow my dream. We all have ideas about the way our lives are going to be; what kind of house we will live in, what kind of suburb. Sometimes, sticking to those ideas can undermine our finances and even undermine our quality of life. Moving somewhere less expensive doesn’t have to be exile, it can be the change that allows you to live the kind of life you dream of, and get financially stable into the bargain. Moving to a less expensive area might mean you can make a tidy profit on your house, and pay off some of your other debts. It could also mean your ongoing costs are lower, and you can put more money towards some of your other financial goals.

Work-Life Balance

A high salary is just dandy, but sometimes it comes with immense hours or high stress. Making the choice to leave a high paying job might seem like a backward financial step, but perhaps it’s the smartest financial (and personal) decision you could make. Working a job purely because of what it will mean financially ten, twenty, thirty years down the track isn’t your only option. You could work a job that demands less hours, and spend the time enjoying your present. Before making the shift, look at ways you can trim some financial fat from your budget. Living a simpler lifestyle could allow you the space to leave the rat race. By cutting down your expenditure, you could have an improved quality of life without losing out on your financial stability.

Debt-Free

I am often guilty of worrying about what everyone else is doing. The road less taken might sound beautiful in poetry, but in real life it can often be a case of feeling very different. It’s good to remind ourselves that there’s nothing wrong with being a bit different, and making alternate financial decisions to every one else. You want a life free of debt? Then I say three cheers. Sure, your friends might have investment properties and share portfolios and that’s great too. But you’ll have a home that nothing can take away from you, you’ll have the freedom to make big financial decisions without having to worry about debt repayments. Choose what works for you.

Ask Yourself First

Where do you want to be in five years, and what do you have to do to get there? Sit down and write it out. Write out some important steps you would like to take. Then write out what aspects of your current lifestyle are helping you get there, and what might be hindering you. There are bound to be some changes that leap out at you. Say, if you want to be rid of your credit card debt in five years yet are living beyond your income, there are changes you can make to get where you want to be. It’s not about being reckless, but about being willing to give opportunities a shot and think outside the box. If done right, your finances will thank you for it.

Get Your Learning

Know the pros and cons of every kind of investment. For instance, I just learned that you need a minimum of $1,000 to take advantage of well-performing government bonds. Read books, articles, talk to people you know who invest (preferably ones that invest well). Talk to a financial advisor, and don’t believe anyone who tells you that their investment is fail-proof.

Define Your Risk Comfort Level

Low risk might not keep up with inflation. High risk might mean you win big or lose everything. Generally, most people want to fall somewhere in between. It could be a good idea to have a portion of your investment that’s safe, and some that’s higher risk. Don’t do anything out of your comfort level, or would hinder your finances for the long-term. Know yourself, and your risk comfort level.

Investments And Goals

Match your investing with your goals. Define your short -terms goals, and how much money you’ll need to achieve them. Obviously, don’t put all your eggs into the growth market if you’re going to need some of it in 12 months time.

Gurus Are No Guide

There’s always something that’s the next big thing. A sure thing. A huge performer. There have been a million of them, and a million gurus who will tell you without a shadow of a doubt that it’s the one for you. Trust, instead, funds that withstand the vagaries of the markets. review shareholder reports, look at consistent companies with solid management.

Diversify

A variety of assets is your best protection. Invest in a mix of stocks, bonds and cash investments. One part goes down, another aspect of your portfolio should steer you through.

Automatic

Invest automatically. I don’t mean unthinkingly; just set up automatic deductions on a weekly basis into an investment account. Setting up automatic deductions for both your savings and your investing will help you set aside a tidy little nest egg for yourself.

Stick To It

Stick to your investment plan and don’t react to the ups and downs of the market. The more often you switch, the more transaction costs you’ll rack up. Periodically check in with your financial planner, and keep an eye on your investments, but don’t make any kneejerk decisions. Knowledge is financial power.

MacBook Air

People are either into Mac or they’re not. And often (I say, as a Mac fan), they’re not into them because they have’t tried them. Once you get into their user-friendly design and their speed, you’ll find it hard to return to PCs. And the best part of the deal? I’ve completely forgotten about hackers and viruses. This may change over the coming years but, as of yet, Windows still attracts all the nasties. And a Macbook Air is so light, you’ll save on physio, cabin luggage costs and gain serious kudos.

Career Makeover

For a thousand dollars, you can get yourself some seriously employable skills. Web technology, project management experience, marketing nous- you can gain any of this and much more by enrolling in a night class at TAFE or your local community college for under a thousand dollars. Or head to a career coach for a session or two. They’ll update your look and give you the language you need to really sell yourself. It’s an investment that’ll pay back, with increased job opportunities and higher rates of pay beckoning.

Buy A Treadmill

Cardio exercise is the number one way to prevent heart disease. It also lowers your risk of cancer and diabetes. You’ll save yourself a small (or significant) fortune by exercising for 30 minutes a day, and buying a treadmill takes away all your weather-related or gym-related excuses.

New Mattress

Sleep deprivation is a killer when it comes to productivity and health, and using a cheap or work-out mattress can make all the difference, between a good night’s sleep and a night of tossing and turning. You’ll sleep better, work harder and have less shoulder and neck health problems.

Invest In The Olds

Our parents are getting older, and pretending it’s not happening is doing no one any favours. So invest in some technology that’ll make their lives easier and safer. An emergency response system. An automatic stove shutoff to avert the possibility of fires (actually, I’m 24 and I’d quite like one). A mobile with buttons you can see. It’ll be worth a thousand times over what you pay in your parents, and your own, peace of mind.

Donate

I wrote in an article last week that donating to charity can make you feel as good as the people who desperately need it- a gift that really does keep on giving. Think about something that you are passionate about- health care, education, helping out victims of a natural disaster. It’s never money that will go amiss.