To successfully make wealth, there is a need of making some investments. However, this is always a risky affair, because an individual can lose their money. This is the reason some investment firms are always reluctant to engage in risky investments such as trading in forex, or other short term means of getting money. As a graduate of finance, the best method that I would advice, which people should use to invest, and there is a high chance of getting their money back, is through the use of long term investment techniques. Long term investment options are always less risky, and the disadvantage is that, the returns they generate is low. In the financial firm that I am working for, they are advocating for the use of long term investments. This is in a bid to manage the massive amount of money that is in their portfolio. Under this portfolio, the minimum amount of money that the company can manage for an individual is 100,000 dollars.
This paper provides an analysis on the best long term investments that the company should engage in. It analyzes a number of options and strategies which includes bonds, derivatives and stocks. The number of years that this paper will focus on, are investments that will take more than five years. This paper will also analyze the managerial strategies that the company uses. These managerial strategies can either be passive or active. In the case of our company, the organization uses a combination of passive and active managerial strategies. This paper will identify and analyze the advantages of these strategies, and how they impact the capability of the company to make rational decisions concerning the management of this money.
Another important factor in consideration is the state of the economy, and the effect it has in the management of assets. It is important to explain that the economic conditions of a state play an important role in determining the value of various investments in the country. Take for example an investment in bonds. The capability of a state to pay these bonds is dependent on its economic performance.
Factors to Consider Before Choosing a Long Term Investment
To achieve success in long term investments, there are a number of factors that business personalities and investors have to consider. Some of these factors include time, the level of risk, the expected returns, alternative investment options, and the kind of money that an investor has. An experienced investor will know that the financial health of a company is an important factor to consider while determining whether to invest in the company or not. Through experience and facts, people who have invested in companies that are not performing well, have lost millions of dollars. Take for example, people who bought the shares and financial securities belonging to Enron in the early years of 2000s. The collapse of Enron saw many people lose their investments.
This collapse was made possible because the company was engaged in unfair financial practices, such as hiding the financial performance of the company. The reason for engaging in this vice was to attract investments, so that the management could raise money through the sale of their securities and other financial derivatives. Therefore, it is important to consider the health of a company before coming up with a decision to invest in it, or not. It is important to explain that shares of a company, is one of the best strategies people can use to invest for a long term. Hence the need of being concerned with the financial capability of the company an individual invests in. The same is applicable when choosing to invest in bonds belonging to governments. The reason that governments normally issue out their bonds, is because of the need to raise money to finance their operations.
It is therefore important to look at the economic and political stability of a country before deciding to buy the bonds that it is offering. Take for example a country such as Somalia. This country is politically and economically unstable. Buying bonds issued by this government is therefore an economic error, and a bad decision. This is basically because the government of Somalia may fail to pay back that money it was loaned to, through the use of the bonds.
Investors such as George Soros and Warren Buffet have managed to make their money through shares and other long term methods of investments. While choosing to invest, there are a number of strategies they use. They normally analyze the financial data of a company, with the intention of looking at the earnings per share of a given company. Furthermore, these investors have an interest in looking at the sales performance of the companies under consideration. This is one of the strategies to use in determining a stable company to invest in.
For example, when investing in shares, for a long term, it is the hope of the investors that the shares will increase in value. However, the shares of these companies may not increase in value, if the company is making losses and it does not issue out dividends. It is the issuance of dividends that makes the securities of these companies to be in demand. It is this demand that pushes up the values of the shares and securities under consideration. Therefore, the financial performance of a company, and its capability to issue out shares is important and must play a role in guiding which long term investment options that the company should use.
Investing in real estate is another important method that can be used, as an example of a long term investment. There is a misguided belief that the prices of properties normally accelerate with time. However, the sub-prime crisis is a proof that the value of properties can decrease with time. This is because; one of the major reasons for the emergence of the sub-prime crisis was the default by mortgage holders, resulting to a steep decline in property prices. It is therefore important and essential for the company to consider a number of factors before deciding whether to invest in real estate or not. Some of the factors include the location of the property, the projected increase in its value, and whether the property is commercial or not. A good real estate property must be accessible, and near areas where an individual can get social amenities. These include hospitals, schools and shopping centers. A property that is near these facilities has the capability of achieving growth, and increasing in value.
It is by considering these factors that the company can choose to invest in either shares/securities, government bonds, real estate, or a mixture of the named options.
Bonds, Stocks and other Sources of Long Term Investments
A government bond is an example of a financial security that is issued out by the national government. While issuing out government bonds, the government makes a promise to pay some periodic interests. At the maturity date, the government will decide to pay the face value of the bond. Most of these bonds are traded through the currency of the country that issues out the bonds. The company has an option of trading in bonds for purposes of safeguarding the interests of its clients. It is important to explain that bonds are low risk sources of investment, and their returns are also low. Furthermore, bonds have a number of risks associated with them; hence, despite being low risk, an individual can lose their money.
There are three major risks associated with trading on bonds. These risks are, credit, currency and inflation risks. While trading in bonds, there are chances that the country which issues out the bonds may default. There is a misconception that because governments are trading with their own currencies, then the risks of defaulting are low. This is because of the power of governments to raise taxes and create their own currencies. However, there are examples where countries have defaulted from paying their bonds. Examples of these countries include Russia, during the ruble crisis of the 1998. Russia was undergoing some economic crisis, leading to its default. This is the reason, before deciding to invest in bonds, an investor has to consider the political and economic position of the country whose bonds they want to buy.
Some of the political and economically stable countries that I can recommend are United States, France, Germany and United Kingdom. However, countries such as Greece have an economy that is undergoing recession; hence investing in their bonds is very risky. In fact, were it not for the bail out by the European Union, Greece could have defaulted in paying its debts, in the year 2015.
Another risk that bonds have is currency risks. Under this situation, investors may fear that the value of the currency they are trading in may fluctuate. This is in comparison to the currency of the bond holder. Take for example in the case of a German investor. The investor may denote that investing in the bonds belonging to United States may have a high currency risk, when compared to the bonds belonging to Germany or other Euro countries. This is because chances are high that American currency may fluctuate against the Euro. It is important to explain that a country which has an history of paying bonds not on their book value is not a good investment option. This is despite the high interest rates that the country may offer. Furthermore, as noted earlier, countries that are economically unstable cannot sustain the value of their currencies. It is therefore necessary to avoid buying bonds belonging to these countries. This is because they have a high credit risk.
Inflation is also another risk associated with bonds. It refers to the decline of the value of money that the government may pay to the bond holder. Bonds are long term sources of investment, and the value of money normally declines. For example, what a dollar can purchase today, is small compared to what a dollar could purchase in the 1990s. To protect investors against the risks associated with inflation, governments normally issue out inflation indexed bonds. These bonds normally link the interest paid to the bond holders to the consumer price index. The maturity payouts are also linked to this price index. Therefore, while choosing the bonds to buy, the company must only choose an inflation indexed bonds. This is the safest types of bonds to buy.
Trading in shares is another option that the company can have. Shares refer to the securities of a company. Companies normally issue out shares with the intention to raise capital for expansion or pay off their debts. Buying of shares can be a good long term investment the organization can engage in. This is because the organization can benefit from dividends, and it may have a controlling stake in a particular blue chip company. Despite the advantages of having shares, it also has a number of disadvantages. One disadvantage is that shares can deflate in value. While investing in shares, it is the hope of the company that its value will rise; hence making profits. However, this is not always the case. It is because companies may perform poorly, and fail to pay dividends. This failure may lead to the collapse of the company, and a decline in the share values. Therefore, it is important to analyze the financial performance of a company before deciding whether to buy in those shares or not.
Investing in real estate is another strategy the company can adopt. Because of the availability of money, the company can easily do it. This is a very good option, but it depends on the type of properties the company seeks to purchase. The company can either purchase residential houses or commercial properties. Commercial properties are of value because companies seeking to do business in them, will be willing to pay lots of money to access the premises. Furthermore, the organization will be getting rental income, which can be re-invested back.
State of the Economy, Taxes and Other Considerations
As noted earlier on, the state of the economy will determine the type of investments to make. It is not wise to invest in an economy that is performing poorly. Of particular concern is investing in bonds. This is because of the risks associated with credit default and inflation. There is also a need of analyzing the various taxes that a government may charge on interests from investments. Looking at these rates is important because it will determine the rates of return the organization will get, from their investments. These taxes are referred to as capital gains. For example in United States, the capital gains tax on a long term investment is 20%. This is a massive percentage, hence the company can decide in investing in countries whose taxation policies are lenient and friendly to investors.
In conclusion, for a long term investment, there is a need of investing in shares, bonds and the real estate. When investing in bonds, investors must analyze the economic performance of the country and its credit worthiness. This is because; investing in an economy that is not performing well is very risky to the bond holder. The government may default, leading to losses to the bond holder. However, investing in financial stable countries will result to the full payout of the bonds, upon maturity. This is therefore a safe and better way of investing.
Another method is investing in shares. In choosing shares, investors must analyze the company, and choose shares belonging to companies that are paying dividends, and the ones which have good sales records. Shares belonging to these companies have the capability of increasing in value after a long period of time. It is therefore a safe method to use. Furthermore, a financially stable company will pay dividends. It therefore means that the organization will also have a source of income if it decides to use this method. In regard to real estate, it is also a good option. Land appreciates in value, and buying and selling them after a period of time will help the company increase its financial capability.