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Today's Stock Market? Alternative Investments
Financial Planning
October 1999
Today's Stock Market? Alternative Investments
The stock markets' last year has made many savvy investors look for other ways to diversify their portfolio. Lower risk investments are becoming more popular than ever before. Here are a few alternatives for your hard earned cash:
Long-term Bonds
There is a small amount of risk in long-term bonds, mostly the risk of interest rates rising. When interest rates rise, this drives the bond prices down. Holding 30-year bonds until maturity is not always a good idea either. You should plan to sell 30-year bonds for a profit after rates fall. You would not buy these bonds as a source of income but rather an alternative to stocks.
If you are of a conservative nature, buy Treasuries, which are the most liquid of fixed-income securities. 20-year Treasury bonds are yielding a little less than 5%. The government issues Treasury bonds in only 30-year maturities, but you can purchase Treasury notes with shorter maturities through Treasury-Direct or a broker.
If you don't mind a little more risk to get that higher yield, purchase Municipal bonds. They have recently yielded almost as much as Treasuries but are free from federal income tax. Some of these bonds are also free from state tax. For an investor in the 28% tax bracket, municipal bonds yielding 5% are the equivalent of about 6%. If you can't afford to purchase at least five municipal bonds for diversity, the total cost which would be around $25,000, then look into investing in a municipal bond fund.
Build up Your Cash Reserve
If lower risk is what you are after, now is the time to build up your cash reserves. You will want to do this until you reach an amount that equals a year of expenses, at least. This will protect you from having to sell assets, such as stocks, when prices are low to pay bills or cover other unexpected expenses. What to do with your cash is the question. Six month to one year CD's only yield about 4% these days. You can put your money in a money market mutual fund, which will give you a little higher rate of about 4.7%.
If you want to avoid state and local taxes, buy a short term Treasury bill that will mature in three, six or 12 months. These bills may be subject to a federal tax. The federal government recently lowered its minimum initial purchase requirements for Treasury bills. You can now purchase them through a Treasury Direct program for as little as $1000.00 without paying a commission. (Check out their Web site at www.treasurydirect.gov).
Real Estate as an Investment
Owning rental property generates cash flow in the form of rent. You can claim depreciation deductions and other valuable write-offs. Relying on tax-deductible bank loans to finance real estate, you can leverage your money. When you sell, if you have been a smart buyer, you will reap the benefits and can use your profits to do it again. If you purchase commercial property, your anticipated net rental income should provide at least a 10% annual return on your invested cash. Residential property usually returns less.
If you don't own your own home, this can be the perfect opportunity to invest in real estate. If you have excess cash, use it to pay down your present mortgage and refinance the new lower balance at a lower interest rate. Your house payments will go down and the extra money saved can be invested elsewhere. If you can buy a new home and keep the old home for rental property, the depreciation deductions on your old home can cut down your taxes to help carry your new investment.
Long-term Bonds
There is a small amount of risk in long-term bonds, mostly the risk of interest rates rising. When interest rates rise, this drives the bond prices down. Holding 30-year bonds until maturity is not always a good idea either. You should plan to sell 30-year bonds for a profit after rates fall. You would not buy these bonds as a source of income but rather an alternative to stocks.
If you are of a conservative nature, buy Treasuries, which are the most liquid of fixed-income securities. 20-year Treasury bonds are yielding a little less than 5%. The government issues Treasury bonds in only 30-year maturities, but you can purchase Treasury notes with shorter maturities through Treasury-Direct or a broker.
If you don't mind a little more risk to get that higher yield, purchase Municipal bonds. They have recently yielded almost as much as Treasuries but are free from federal income tax. Some of these bonds are also free from state tax. For an investor in the 28% tax bracket, municipal bonds yielding 5% are the equivalent of about 6%. If you can't afford to purchase at least five municipal bonds for diversity, the total cost which would be around $25,000, then look into investing in a municipal bond fund.
Build up Your Cash Reserve
If lower risk is what you are after, now is the time to build up your cash reserves. You will want to do this until you reach an amount that equals a year of expenses, at least. This will protect you from having to sell assets, such as stocks, when prices are low to pay bills or cover other unexpected expenses. What to do with your cash is the question. Six month to one year CD's only yield about 4% these days. You can put your money in a money market mutual fund, which will give you a little higher rate of about 4.7%.
If you want to avoid state and local taxes, buy a short term Treasury bill that will mature in three, six or 12 months. These bills may be subject to a federal tax. The federal government recently lowered its minimum initial purchase requirements for Treasury bills. You can now purchase them through a Treasury Direct program for as little as $1000.00 without paying a commission. (Check out their Web site at www.treasurydirect.gov).
Real Estate as an Investment
Owning rental property generates cash flow in the form of rent. You can claim depreciation deductions and other valuable write-offs. Relying on tax-deductible bank loans to finance real estate, you can leverage your money. When you sell, if you have been a smart buyer, you will reap the benefits and can use your profits to do it again. If you purchase commercial property, your anticipated net rental income should provide at least a 10% annual return on your invested cash. Residential property usually returns less.
If you don't own your own home, this can be the perfect opportunity to invest in real estate. If you have excess cash, use it to pay down your present mortgage and refinance the new lower balance at a lower interest rate. Your house payments will go down and the extra money saved can be invested elsewhere. If you can buy a new home and keep the old home for rental property, the depreciation deductions on your old home can cut down your taxes to help carry your new investment.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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