GR Focus Finance

People tend to categorize investing in the stock market as being high-risk. They also refer to bonds as safe investments.

But how accurate is this? Are bonds truly one of the safest investment vehicles? The editors at SmartMoney magazine aren’t so sure.

In early January, SmartMoney ran an intriguing story looking at the rush investors have made to sink their dollars in municipal and corporate bonds. These investors are pouring their money in bonds for one reason: They’re looking for investments that are safe and steady.

Thing is, not all bond funds have performed well for these investors, SmartMoney wrote. Many bonds are yielding less than half of the returns they were offering just last summer, according to the story.

This comes as shocking news to many investors. We’ve all been conditioned to view bonds as safe investments. Sure, they may be boring, with returns that seldom soar as high as do the ones provided by the best stocks. But bonds are steady, we’ve been told.

But bonds are like most investments: You can lose money on them.

And that’s been happening a bit more these days. The writers at SmartMoney compare it with real estate in the 2000s and tech funds in the 1990s. These investment vehicles, too, were hot, with investors rushing to put their money in them. Then they both crashed, erasing a lot of paper fortunes as they did so.

There hasn’t been a bond crash. But SmartMoney writes that there is certainly a bit of a bond slowdown going on now.

It’s not that bonds are bad investments. It’s just that they bring with them the real potential for risk. This means that investors need to do as much research before investing in bonds as they do when they put their money in the stock market.

This is where the advice of a trusted financial advisor comes into play. A financial partner can help you study the bond markets and find the investment vehicles that work best for you. There’s no reason why your portfolio shouldn’t include some bond investments. But it should also include other vehicles, such as stocks. The key to a successful investment portfolio still lies in diversifying your investment dollars.

Next time you read about an investment vehicle that comes with no risk, don’t believe the hype. Even those investment vehicles that promise slow, somewhat boring returns, come with their own risks.

There was a time when people considered real estate to be the safest investment a person could make. And why not? During the big real estate boom of the late 1990s through the first half of 2006, home values across the country shot up. People who bought condos or single-family homes in most major cities saw their housing values skyrocket sometimes by 200 percent or more.

Of course, those days are long gone. Today, a growing number of homeowners are watching in horror as their housing values continue to fall. The Wall Street Journal recently reported that nearly 25 percent of U.S. homeowners were underwater in the third quarter of 2009. This meant that they owed more on their mortgage loans than what their homes were worth, a financial situation no one wants to be in.

That leads to one big question: Is real estate still a sound investment?

The answer, not surprisingly, is complicated. It all depends on how quickly you want to make money.

With the real estate boom ended, flipping real estate properties is no longer an effective way to make big money. This was a big trend in the late 1990s, early 2000s: Investors would buy condos or single-family homes in trendy city neighborhoods or in communities that were in the middle of becoming trendy. They’d renovate these often dumpy residences – adding such touches as new hardwood floors, updated kitchens and larger master bedroom suites – put them back on the market and sell them for double what they paid.

Flipping made a lot of people very wealthy very quickly. Today, though, real estate investors have to exhibit a different kind of skill: patience.

Today’s investors must hold onto a home for five, seven or 10 years to see any serious price appreciation. This may seem unfortunate, but it’s actually the way real estate investing used to work. You’d hold onto a property, either living in it or renting it out, and then sell it for a solid profit of $50,000 or more. That’s not bad for an investment that you hold onto for seven years or so. Historically, housing values have increased. And by holding onto a home for seven years, you can increase your odds of riding out any real estate slump or slowdown that might occur.

So, yes, real estate investing is still a positive option for your investing dollars. Just don’t expect to make a fortune overnight. Real estate today is truly a long-term investment.

Not many beginning investors understand how a variable annuity works. But the investment products are actually rather simple. And they may have a place in your investment portfolio.

At their most basic, variable annuities, like fixed income annuities, are a contract between an investor and an insurance company. Investors agree to pay, either in a series of payments or in one lump sum, a fee to the insurance company. The insurance company then agrees to send payments to the investors either immediately or at a future date.

The annuity’s managers will invest the payments they receive into a range of investment options, usually mutual funds. Of course, because the performance of these funds is not guaranteed, investors will either see their investments increase in value or fall. This is no different than investing in mutual funds or stocks in general.

Annuities do differ in that insurance companies will send investors in a variable annuity a stream of payments on a regular basis. These payments, which usually come every month in the form of a check, can last for a set period of time, such as 20 or 30 years, or for an indefinite period, such as the lifetime of the investor.

Because of this “checks for a lifetime” option, many older investors place some of their dollars in variable annuities. They like the idea of receiving that extra check. It provides them with a boost in their financial security.

Variable annuities also have another benefit: Their earnings are tax-deferred. This, too, appeals to a lot of investors who are seeking tax havens for their dollars.

Finally, many variable annuities provide a death benefit. When investors pass away, the annuity pays a lump sump to the investors’ named beneficiaries. This lump sum is usually the annuity’s account value or an agreed-upon minimum payment, whichever is greater at the time of the investor’s death.

Those are some heady benefits. But variable annuities, and all annuity products, do have their critics. The critics point out that some life insurance companies charge investors hefty fees for the right to put their dollars in an annuity. Others don’t like the sometimes hard sell that life insurance companies engage in when trying to sing investors up for their annuity products.

Like all investment opportunities, variable annuities come with their own set of positives and negatives. It’s up to individual investors to do the research needed to determine if any kind of annuity is right for them.

The old investing cliché is a true one: Buy low and sell high. Unfortunately, too many investors lack the patience to follow through on the second part of that cliché.

Look at what’s happened during the country’s Great Recession. As the national economy stumbled, fell and plummeted, investors got nervous. Many of them pulled the dollars out of their mutual funds as they watched the value of these funds fall.

Unfortunately, that was the wrong thing to do. Too many of these investors pulled their money out of their funds when their investments had shrunk to their lowest levels. Now, the stock market is on the rebound, with the Dow Jones Industrial Average rising past 11,000 in April. And this is no isolated rise; the market has been rising steadily for 13 months now.

Those investors, then, who panicked and pulled their money out of their mutual funds when the market was in the tank lost a significant amount of money.

Now, this rule of patience doesn’t hold for investors who are nearing retirement. They have to do everything they can to protect their money. That often means moving their investment dollars from risky products, like stocks, into safer ones such as bonds and money market accounts.

But those investors who moved their money simply because they couldn’t bear to watch their mutual funds fall in value, are the ones who are now suffering. While most investors today have sent their mutual funds – and their 401(k) accounts – soar along with the stock market, those who pulled their dollars out at the low point are left with only losses to show for their investing.

These investors violated the old cliché. They may have bought low, but they sold low, too, and that’s no way to make big gains when investing.

It’s why financial planners preach patience whenever they advise clients on their investments. This holds true for just about any investment. Look at real estate. Today’s planners will tell you that investors need to hold onto their residential real estate for seven years or longer if they want to see a good profit from it. The same holds true for mutual funds or stocks: Patience is the key here.

Investing sometimes requires nerves of steel. And it always requires patience. Don’t panic when your investment falls in value. It often makes sense to wait out the down times. Just ask anyone who bailed during the depths of the Great Recession. Odds are, these people would love to have kept their money in their mutual funds.

It’s almost become a cliché: Past performance does not guarantee future results. But it’s a lesson too many investors ignore.

Just because a certain mutual fund has performed exceptionally well during the economic slump, doesn’t mean that it will enjoy the same returns once the economy recovers. Just because a certain stock has been rising steadily, doesn’t meant that next week it won’t crash.

The unfortunate truth is this: No one can predict what any mutual fund or stock will do tomorrow, next week, next month or next year. The performances of these vehicles rest on too many factors. Stocks, after all, rise or fall often on rumors and innuendos. A mutual fund’s value may dip or soar based on events that happen in foreign countries thousands of miles away.

This isn’t to say, though, that investing is purely a game of chance. It’s not. Wise investors know how to hedge their bets, and protect themselves financially as much as possible. They know how to spread the investment dollars over a diverse array of stocks, bonds and other investment vehicles so that if one investment struggles, the success of others will cover it.

Too many other investors, though, invest their money on hunches. They may see that a certain stock has been a strong performer for a year and move vast sums of their investment dollars from other vehicles into that steady performer. They’re then shocked when the stock eventually begins to struggle.

The best way to approach investing is to treat it like a job: This means you have to stay abreast of financial news by surfing the Web and visiting the most respected financial advice sites. It means working with a trusted financial advisor who can help guide you through the often challenging world of investing.

And it means, most of all, recognizing that no investment, ever, is a sure thing. Investment always involves a certain amount of risk. Even the hottest funds and stocks can lose value. Even the steadiest of performers can enter a slump. And, despite what some people might claim, there’s no real way to predict when a hot performer will suddenly turn cold.

This brings us to the last big rule of investing: Only invest what you can afford to lose. That does sound a bit like gambling: You don’t bet more than you can lose. The big difference, though, is that investing requires serious study and planning.

It’s wise to find a trusted financial advisor to help you plan for your retirement. This advisor can help you create an investment portfolio, one that includes stocks, bonds, annuities, CDs and other savings vehicles, that will help you prepare financially for your retirement years.

You should make sure, though, that you are working with a financial advisor who has your best interests at heart. Guaranteeing this requires a bit of homework. But if you do the advance research, you just might end up with a trusted financial advisor for life.

Before agreeing to work with any financial planner or advisor, it’s best to interview several candidates first. Ask these professionals about their experience; how long have they worked as advisors? What kind of clients do they typically work with? Do they believe in aggressive investing or are they more conservative when it comes to their clients’ dollars?

Next, ask about their fees. Make sure you know in advance every fee that a financial advisor will charge you. Some will charge a flat monthly fee, while others will charge fees based on the performance of your investment dollars. No one way is superior to another. Just make sure to pick an advisor who charges in a manner in which you are comfortable.

You should also ask for a list of references. Call these references and ask them if the financial advisor is quick to return phone calls, if the advisor follows through on promises. Ask, too, if the advisor has ever pressured clients to make investments that they weren’t comfortable with. Ask, too, if the advisor has ever tried to sell clients financial products in which the advisor had a vested interest. You’ll want to avoid planners who engage in this kind of behavior.

Finally, stay away from financial advisors who make bold promises on the returns that they can bring you. The truth is, not even the savviest financial minds can predict the future direction of investment vehicles. The performance of stocks and mutual funds vary according to so many different factors. It’s impossible for anyone to guarantee how any investment will perform.

If you meet up with advisors who boast that they can time the market perfectly or that they have a perfect track record in predicting big winners, you should run away. These advisors are obviously lying.

Picking a financial advisor is not the easiest of tasks. But with a bit of research, and by asking the right questions, consumers will greatly increase their odds of finding the right planner for them.