News: SEMA Announces Finalists for Automotive Influencer of the Year
The entrepreneurs coming into the industry know how to invest their money so it works for them — and so they don’t have to work so hard for it.
The past year has brought with it some interesting changes in the industry. And these changes have brought into the industry some interesting people. Suddenly, a blue-collar industry once comprised of Moms, Pops and shop dogs is now attracting Wall Street financiers, investment bankers, venture capitalists and insurance moguls.
Besides the influence these entrepreneurs are having on the industry, their close proximity has also piqued the interest of many people within the industry: "How do people like them make the kind of money they do?"
For starters, they invest.
But how many shop owners do you know who invest money outside their businesses? A lot? A few? None?
Why so low? Because investing takes investing know-how, which most shop owners don’t have — yet. But they can learn, and they can — and should — also seek professional advice. Even financial gurus have other financial gurus who they get their advice from.
Would you like to start investing but don’t know where to start? Consider the following:
$ Make long-term investments. The key to successful investing is to concentrate on long-term planning, not on today’s risk. Many investors take the Las Vegas approach to investing. They put their money in what they think is a hot investment and, if the payoff doesn’t come overnight, they take what’s left and invest it elsewhere. Attempting to time shifts in the stock market has caused many people to go broke.
While the stock market swings up and down during the short term, returns on investments in stocks over the long term historically have exceeded returns from other investments. While past performance may not be indicative of future performance, experts suggest stocks as an investment if you plan to keep your money in the market for five years or more.
$ Assess your tolerance for risk. Too many investors look at their upside potential, but not their downside risk. They focus on the return they’d like to make but pay little attention to the potential losses they may incur. It’s best to make all investments with your eyes wide open and determine the worst performance you can afford.
How much risk you’re willing to tolerate should depend on your financial goals, the length of time over which you’re investing and your personal investing profile. Some people are more risk tolerant than others and will risk investing in aggressive growth stocks, for example, knowing that the potential for losses is balanced by the potential for higher returns. Financial consultants are experienced at balancing a portfolio so it matches the investor’s risk profile while achieving his or her financial goals.
$ Diversify your investments. Regardless of your risk tolerance, no one should take risks unnecessarily. That’s why savvy investors diversify, regardless of their tolerance for risk. This typically reduces risk because, at any given time, some investments perform well while others don’t.
Mutual funds provide a great deal of diversification because each fund invests in many different financial instruments. A growth-equity fund, for example, invests in a variety of growth stocks and typically invests a small part of the fund in other areas, such as money-market instruments.
Many investors follow a strategy called asset allocation, maintaining a diversified balance between stocks, bonds, money-market funds and other investments. Some mutual funds, called "balanced" funds, practice asset allocation.
$ Know what’s available. Most investors are familiar with stocks, which provide investors with an ownership interest in a company. Most are familiar with bonds, which are used to secure debt financing. Fewer investors are familiar with other investments, such as variable annuities and insurance products, which can combine tax advantages and insurance protection with the potential for high returns.
An annuity is a tax-deferred accumulation contract in which the buyer contributes a lump sum or series of payments and, in return, can receive a lump sum or regular payments for life or for a fixed period. Investors can choose between fixed annuities, which provide a guaranteed principal and a guaranteed return, and variable annuities, in which the value fluctuates based on the performance of the underlying investment accounts. Using variable annuities, investors can allocate their funds to stocks, bonds and money-market accounts with a wide range of risk and potential return.
Variable universal life combines the insurance security of universal life insurance with the investment aspects of variable life insurance. It allows policyholders, within certain guidelines, to design their own policies by increasing or decreasing their premium payments and by increasing or decreasing the policy death benefits.
Instead of the insurance company investing premiums and cash values on behalf of the policyholders, variable universal life allows policyholders to make investment choices from several different accounts. Typically, these accounts provide a wide range of investment selections with various levels of risks and returns, and allow policyholders to match investment objectives with their own risk tolerance.
A more conservative option is universal life insurance, which offers the cash-accumulation features of whole life, as well as flexibility of premiums.
$ Review your balance of investments. If an investor using an asset allocation strategy typically keeps 70 percent of his or her portfolio in stocks, a 10 percent drop in the value of the stocks would reduce the percentage to 68 percent, assuming there was no change in the value of the remaining investments. The investor may take advantage of lower prices, buying up enough stock to bring the balance back up to 70 percent. That way, the investor is positioned to more than make up for any short-term losses if the market rises again.
$ Look at your real rate of return. Some investors are nostalgic for the double-digit returns their CDs gave them in the early ‘80s — forgetting that double-digit inflation was common at the time too. Investors should subtract the rate of inflation from the yield they’re earning on an investment. That way, they’re measuring the real gain in the value of their investments. It’s better, for example, to earn a 5 percent return when inflation is 3 percent (2 percent real interest) than it is to earn an 8 percent return when inflation is 10 percent (-2 percent real interest).
$ Practice dollar-cost averaging. By investing the same amount every month — known as dollar-cost averaging — the investor can reduce risk. Because the amount is consistent from month to month, the investor is purchasing more shares when prices are low and fewer when they’re high. If the stock market has a severe correction the day after an investor puts $12,000 into stocks, it’ll take the investor a long time to recover. But, if the same investor were investing $1,000 a month, the correction would have much less of an impact. Dollar-cost averaging requires continuous investing during all market cycles but, keep in mind, it can’t protect investors against loss or guarantee a gain.
Writer Barrett W. Butlien is a small-business planning specialist and a representative of Allmerica Financial — The Westchester Group, Tarrytown, N.Y. He’s also a registered representative of Allmerica Investments, Inc., a registered broker-dealer. To contact him, call (914) 332-5700, ext. 278.