My father in-law swears by single stock picks and CDs. He says he’d made lots of money this way over the years. What do you think of this strategy?
I guess that depends on what you call “lots of money.” Single stocks and Certificates of Deposit — I like to call them Certificates of Depression — are not the route I’d use for investing. There are much better ways to handle your money!
I don’t own single stocks, and I won’t suggest them as part of a good investment plan. The fact is that single stock investments don’t consistently generate returns like good, growth stock mutual funds. If, for some reason you’re just in love with the idea of owning stock, I’d suggest that you limit your single stocks to no more than 10 percent of your investment portfolio.
The problem with CDs is the possibility of having to pay fees for early withdrawal, and the fact that they have a very low rate of return. As an investor, you need to see high enough returns to outpace inflation — about three to four percent a year — and to pay taxes on the gains if it’s not inside a retirement account. Most investors need to see about six percent per year over time to do these things.
I’d suggest using CDs only for savings, like for purchases or maybe taxes if you own a business. Not for long term investing.
We’ve completed the first three Baby Steps, and we’re ready to start investing. Our friends recommended an advisor, and after a few meetings with him we’re very confused.
He seems to be pushing us toward certain things we don’t understand. Is this unusual, and will things become clearer over time?
Here’s the deal on advisors — they advise, you make the decisions. This is very important. If this “advisor” is being really pushy or not making things understandable for you, then you need to find someone else.
When you go to a financial advisor you’re paying them for their advice, expertise and their ability to teach you to make smart decisions about your investments. You may have heard me say to search out someone with the heart of a teacher. This is very important when it comes to handling your money. I mean, you’ve worked hard for it and now you want it to work hard for you. Are you willing to just throw it at something because a guy in an expensive suit says so? I hope not!
Don’t invest in anything unless you understand it fully and can explain how that investment works to someone else. Investing doesn’t have to be complicated, but you need a good teacher.
And good teachers can impart knowledge in a way that will eliminate fear and confusion.
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