Back To The Basics

Back to the basics. During a recent conversation I was reminded the media (this means advertisers) and sales representatives (representing either themselves or whoever writes their paychecks) continue to make the whole question about investing more difficult than it needs to be.

You have three choices on what to do with your income. Spend it on consumables such as food, gas, etc. Loan it to someone. Or, purchase an asset. Placing it in a can in the back yard or under the mattress is certainly another option—but we are not going there.

Loaning your hard earned income to someone can be as simple as placing the money in the bank. You are entrusting your dollars to an institution for safeguarding and maybe even some interest. The reason you may receive interest is because the bank lends your money to the other clients at a higher interest rate and they share the income with you.  FDIC guarantees your principle but the interest promised is not.

Loans can certainly be more exotic, or should I say risky. And it is possible to lose all your principle. Your challenge, if you invest outside a bank or credit union, is understanding the risk before you invest the money. Keep in mind that nearly all banks and credit unions now offer investment products that are not FDIC insured

Purchasing an asset can be divided into two categories. Some assets are considered depreciating assets and others have proven to appreciate in value over time.

Depreciating assets will decrease in value and ultimately become junk. A car is the classic example. Keep in mind; a car is nothing more than a box on four wheels that gets you from point A to point B. If you wish to see a complete list of other depreciating assets, go to a garage sale. If you want to become wealthy, avoid putting a lot of money in this type of asset.

The most common appreciating asset you can purchase is real estate or ownership in a corporation (stock). This can be a home for your family or a portfolio of individual stocks.

The key to appreciation is TIME. Values of assets will go up and down with the economy. Holding appreciating assets for long periods will generally make them more valuable.

You constantly hear the terms annuity, 401k, or mutual fund. This is just a classification of product that can be a variation of loan or own. In most cases, you can have a combination of both in the same package.

So much for the basics. The hard part is determining who to trust in managing your portfolio. And then the question of monitoring their performance.

The author is a counselor for Financial Solutions of SW Washington, located at 1339 Commerce, Suite 203, Longview WA. If you have questions about this article or have ideas for future topics, please contact him @ 575-9395.