Investing: How to Lower the Risk, part 4

Investing: How to Lower the Risk, part 4

By Keith Bunn Jr.

May 5, 2013

Good morning. I hope all is well with you on this fine May morning! 

This week's blog, we are going to talk about Real Estate as an investment and Annuities. But first, let's review last week's blog.

Review

Bonds are nothing more than an I.O.U. They are a high risk investment because they act like a single stock. Bonds have an end date of when they have to be paid off. Their ability to pay you back is based on their performance. So I don't recommend bonds.

Mutual Funds are where investors like you and I, pool our money together to invest into 90 to 200 companies. Professional portfolio managers manage the pool or fund and our return comes as the value of the fund increases. Simple put, in just one mutual fund, you and I could be investing anywhere between 90 to 200 different companies at one time. In other words, we are being diversified! Which lowers our risk. The thing I like about mutual funds is that there are all kinds of funds out there and each one of them have tons of companies inside them that make you diversified. Because if some of those companies inside the fund goes down in value, the others maybe going up, making up the difference. 

Real Estate and Annuities

I'm going to be perfectly transparent with you all. I don't know a lot about these topics and almost didn't write about them, but these 2 topics are apart of investing and are worth mentioning. So I will share what I know.

Real Estate, for the most part, is a great investment, however it is the least liquid or the hardest to get any money out of it if you need to, and if you buy investment property with debt and you have to sell it quick, you may not get any money out of it at all. In other words, you lost your investment.

When buying investment property, the best way to do it is to buy it slowly and use cash to buy it out right. Now I know most of you out there don't think anyone can buy a house out right, but if you think about it, if you were debt free including your home, why couldn't you buy a home out right? It would take a while to save up for it, but it can be done. And the more investment properties you buy that way the easier it will be to buy more because of the income the properties you already have will be bringing in. The main reason for buying investment properties with cash is because if you don't have a tenant in there paying rent, you're not freaking about how you're going to make that monthly mortgage payment.

Have you ever heard the phrase, "The money is made at the purchase"? Well that is another way you make money buying investment property, at the purchase, meaning you buy the property at a GREAT deal. Can you get deals like that all the time? No, it takes a lot of patience, but when you do get those deals, you'll be glad you did.

Annuities are nothing more than a savings account at an insurance agency  You sign a contract with the insurance company and it is designed to make payments to you at specified intervals. These payments usually happens after you retire. When the money is paid out to you, it is then taxed, making this type of investment a taxed deferred arrangement. 

There are 2 different types of Annuities, there are Fixed Annuities (which really aren't fixed) and Variable Annuities.

Fixed annuities guarantees a certain rate of return which is around 5%. These are a horrible investment long term because inflation has averaged around about 4%. So you're not really making much money in the end.

Variable Annuities typically have a better rate of return because of the mutual funds that are inside the them, but the rates do vary from time to time just like all mutual funds do. 

If I were to pick either one of these types of annuities, I would pick the variable annuity, but as I have said many times, I don't do ANY investing with an insurance company. I just like to keep things clean and simple. Insurance with an insurance company and investing with an investment broker, but that's just me.

Next week, I will go over what types of investments that are just horrible and should never be bought.

Questions

1) Have you ever bought or do you know someone who has bought a home or investment property with cash?

2) Do you think it is possable to buy investment property with cash? Why or why not?

3) Have you ever bought an annuity before? If so, which one did you buy?

The reason I do this is to give people hope and to try to inspire others. To make them think about their finances, whether they are young or old, so they can win financially.

If you have any questions for me about my posts or about your finances, you can call me at (616) 454-2046 or e-mail me at cavuscoaching@gmail.com. You can also find more money news, facts and ideas, on my Facebook and/or Twitter pages. I'd be grateful if you followed me. Thank you!