If you have any investments at all, good for you. The average American family has just $3,800 in their savings account, and one in four have no savings or emergency fund. A sad 40% of adults in the US have no retirement savings at all. The icing on the cake is the $2,200 average Americans owe on a credit card, leaving far too many with a negative net worth. Just by understanding the value of investing, you are out in front of the pack.
Many are put off by the topics of investing and money management because they don’t understand them, and the word “investor” conjures up 20-year-old images of day traders at high tech workstations, and rooms full of harried stockbrokers feverishly working the phones all day. Some who understand the wisdom of putting their money to work turn to investment advisers, thinking they’re getting good counsel — when, the majority of the time, the people they’re talking to are nothing but salespeople with a fancy title. The majority of those salespeople have no background in finance and no fiduciary duty to their clients. That prompted the Board of Certified Financial Planners, investment counselors who do have a duty to their clients, to put out this tongue-in-cheek commercial.
The truth is investing is not that hard, and frequently the best-performing investments are downright boring. Here are four boring investments that anyone with a brokerage account can buy.
Market Index Funds
Index funds like the Vanguard 500 Index Inv (VFINX) are designed to mirror the returns of broad market indexes like the S&p 500 and Dow Industrials. There is no high-priced fund manager or staff of analysts; most index funds are managed by relatively simple computer programs. The lower overhead results in lower expenses, and your money tracks right along with the stock market for better or worse. Over the long haul, at least so far, that performance has been quite good.
Sector funds are like index funds for specific industries. Let’s say you believe in the future of green, alternative energy. You can shop for funds like Guinness Atkinson Alternative Energy (GAAEX) or Firsthand Alternative Energy (ALTEX). There’s a mutual fund or Exchange Traded Fund (ETF) for almost any economic sector you can imagine. Shop carefully, as sometimes the fees on sector funds can be higher than market index funds.
DRIPs (short for Dividend ReInvestment Programs) are the most fantastic money multipliers ever developed for small investors, and it’s very easy to participate. Companies offer direct sales of their stock, usually through an agent, and dividends earned are reinvested back into more company stock. Some companies even offer DRIP participants a discount on stock purchases if they commit to investing a fixed dollar amount every month.
The DRIP trend seems to be catching on, with most investment houses now offering dividend reinvestment programs for both mutual funds and ETFs. A simple dividend reinvestment program, coupled with monthly contributions, is like a money snowball rolling downhill. I’ve seen very average people get very rich practicing a steady, consistent investment plan using dividend reinvestment.
Anyone who reads my columns regularly knows that I’m particularly hard on the retail housing market as an investment. The trick is to understand the difference between “housing,” which is a losing investment for most people, and “real estate,” which is how people like Donald Trump’s dad got rich.
All the investment types listed here carry some risk, but a Real Estate Investment Trust, also called a REIT, is the riskiest — but also has the potential for big rewards in the form of big dividends. REITs enjoy certain tax advantages, provided they distribute at least 90% of their profits in the form of dividends. Do be aware the income from a REIT is also taxed differently for you, usually at a higher rate. Still, the rewards can be eye-opening.
You should wait until you’ve had a bit of experience researching other types of investments before jumping into a REIT, which is why it’s last in this list. Pick out REITs with large market capitalization and a long history of dividends. Do be aware that the real estate market can be volatile, and even Donald Trump’s companies have filed bankruptcies at least four times. Consequently, REITs are less “set and forget” than the others listed here. So you should build up to a REIT investment, but the really good ones are boring, with outsized and steady returns.
With a little research and lot of patience it’s possible to seek out high quality, low fee investments; and you don’t need a broker or investment salesman to help. Sometimes it’s good to be boring.