The Pros and Cons of the Five Basic Investments | Part 1

You might have wandered how some people just become rich even when times are not right (If you are reading this in 2020 you know what we are talking about) or how some people are get richer day by day even when times are right and everyone else is struggling for every nickel and dime. The answer is ‘Investing’ and in order to do that one must know how to invest.

What you are about to read is an excerpt from the book ‘Learn to Earn’ written by one of the most successful investors and Hedge Fund manager on Wall Street, Mr. Peter Lynch and co-author John Rothchild.

This is a five part series where we will go through the 5 basic ways of investing and learn about their Pros and Cons from the expert.

Have a good read.

Money is a great friend, once you send it off to work. It puts extra cash in your pocket without you having to lift a finger. Many people wait until they are in their thirties, forties, and fifties to start investing money. It dawns on them that they’re not getting any younger, and soon enough they’ll need extra cash for retirement. The trouble is, by the time they realize they ought to be investing, they’ve lost valuable years when stocks could have been working in their favor. Their money could have been piling up.

There are five basic ways to invest money:

1. putting it in a savings account or something similar
2. buying collectibles
3. buying an apartment or a house or land
4. buying bonds
5. buying stocks. 

 Let’s examine these one at a time.

Savings Accounts, Money-Market Funds, Treasury Bills, and Certificates of Deposit (CDs)

All of the above are known as short-term investments. They have some advantages. They pay you interest. You get your money back in a relatively short time. In savings accounts, Treasury bills, and CDs, your money is insured against losses, so you’re guaranteed to get it back. (Money markets lack the guarantee, but the chances of losing money in a money market are remote.)

Short-term investments have one big disadvantage. They pay you a low rate of interest. Sometimes, the interest rate you get in a money-market account or a savings account can’t even keep up with inflation. Looking at it that way, a savings account may be a losing proposition.

Inflation is a fancy way of saying that prices of things are going up. When gas goes from $1.10 a gallon to $1.40, or a movie ticket from $4.00 to $5.00, that’s inflation. Another way to look at inflation is that the buying power of the dollar is going down.

In recent times, inflation has been running just below 3 percent, which means for every dollar you own, you’re losing three cents every year. This adds up very quickly, and in ten years, at the present rate of inflation, all your dollars will have had thirty cents taken out of them.

The first goal of saving and investing is to keep ahead of inflation. Your money’s on a treadmill that’s constantly going backward. In recent years, you had to make 3 percent on your investments just to stay even.

Money markets and savings accounts often don’t pay enough interest to make up for the losses from inflation. And when you subtract the taxes you have to pay on the interest, money markets and savings accounts have been losers in at least ten years out of the twenty shown on the chart.

That’s the problem with leaving money in a bank or a savings and loan. The money is safe in the short run, because it’s insured against loss, but in the long run, it’s likely to lose ground against taxes and inflation. Here’s a tip— when the inflation rate is higher than the interest rate you’re getting from a CD, Treasury bill, money-market account, or savings account, you’re investing in a lost cause.

Savings accounts are great places to park money so you can get at it quickly, whenever you need to pay bills. They are great places to store cash until you’ve got a big enough pile to invest elsewhere. But over long periods of time, they won’t do you much good.

We hope you understood everything about Savings Account. Wait for Part 2 where we will know about ‘Collectibles’.

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