5 Tips to Create Sustainable Wealth – Trading Basics

This is a topic all on its own so I’ll try to just briefly list and give a few details about the benefits of each option. And remember diversification is very important to a portfolio, but don’t go crazy and spread yourself to thin, this is a mistake a lot of new investors make. They get attracted to everything bright and shiny and think that more will yield more returns, when investing it’s quite the opposite as I have found. If you have 10K and you split it up with only 2 in each investment option one will outperform the other and it will be a waste of allocated funds.

Generally speaking since you are aiming to create a nest-egg you will not be focusing too much on stocks, options or futures, and more on ETF’s, Mutual Funds, and IRAs. If you happen to find a CD account with an ungodly amount of interest then go for it, but they are old-news and investors have moved on from these in the last 10 years.

– Stocks, Options, Futures

For intermittent income this is not a bad idea. If you employ the same method of automatically purchasing a set amount of stock every week or month, you end up lowering your dollar cost average over time. Options and futures are more short term and meant for seasoned traders with knowledge of how they work, not to mention there is a considerable amount of risk involved with day-trading and options trading. For longer term purposes it would be a better idea to look up who the running “Dividend Aristocrats” are. These are publicly listed stocks available that pay very solid and reliable dividends. These dividends can be reinvested into your portfolio making it grow even more as I do not advise taking them as income since you want to save, not spend.

– IRAs, & Mutual Funds

These are definitely meant for long term investing. In fact, with most IRAs you can’t touch any of the money at all for a 5-year period. Please research the difference in benefits and drawbacks between both traditional and Roth IRAs before deciding as they are important and will affect which product you choose. The main difference is a traditional IRAs will lower your taxable income in the contribution year, however if you are under 59 and a half, you will pay a 10% penalty (in addition to brokerage fees) for early withdrawal. With a Roth IRA however, you can withdraw contributions (but not earnings) penalty free before that age, and tax free (since you contribute funds after tax) at any time.

I personally like Roth IRAs better because you can invest them in anything you want, it could be an index funds, an individual stock or many other alternative investments. They are flexible, safe, and yield high returns. Remember those “Dividend Aristocrats” I mentioned … yeah, you can re-invest all those dividends into that Roth IRA if the account is invested in one of them, hint hint.

Mutual funds are a different investment strategy entirely, and as a long-term extra source of income can work well too. These are managed accounts and could be invested in one or many strategies by the managing firm. The advantages are simple, diversification, transparency, and variety. But the drawbacks are mainly the fees involved of someone else earning you money. You also usually need quite a sizable portfolio to invest as the management companies have minimums. In terms of taxes though, you can get them tax-deferred if holding the mutual account in a 401K or IRA like we discussed before.

There are many options with these forms of investments so make sure you dive in, do your research, and read all the fine print of the types of accounts your choosing, and who they’re from. It’s your money, and you don’t want someone careless managing it, or have your money stuck in a low yield account for years.