Have You Had Dismal Money Market Returns?

For example, Franklin Templeton Money Market Fund returned .22% over the last year! That is less than 1 percent!And, every other money market fund available will have similar returns. That is because money market funds are designed as safe places to park investing money for the very short term.Money market funds are not investments.

How To Make Income Off Your Investments

If you are investing for income, there are other approaches which limit risk, and actually provide enough money to improve your cash flow.If you look at the top one year Canadian Mutual Fund performer, as of March 2011, it is the Bissett Energy fund which returned 66%.I would suggest following an investing system which allowed you to benefit from returns like these while limiting risk.

Safely Invest Your 3-6 Month Emergency Fund

If you are a follower of Dave Ramsey, as I am, and have 3-6 months income in a money market account, you could be making a far greater return from this lump sum of money.The only ultra-safe way to invest this money, that has any return to it, is to be a bond issued by a stable government.

For example, you could buy a Federal Government Treasury Bill which pays you in the neighbourhood of 4% interest per year. And this will be a long term bond, so you will probably have to hold it for 10 years or more. This is probably not the best idea for your 3-6 months income amount. So you are back to the money market fund, which basically pays you nothing.

If it was my, I would be identifying the top performing mutual fund sectors over the last 3 months to 1 year. I would then be invested in 4 of these top funds from various sectors.Then I would switch these investments from time to time, whenever a fund I was invested in dropped out of the top 5.

And, you need to pay attention to the market, to make sure that there is never a day with a market drop of over 3%. Always use metatrader 4 analysis tools to monitor the market. This is your emergency parachute signal. If a drop like that happens in one day, and it will be on the news, then you need to switch all your money back to a money market fund until the carnage ends (which could be months later).

Overall, you just need a system that identifies good investments and profitable stock picks and limits risk.Focusing on money market fund rates won’t help you.

But, a system will.That’s what I do.

What Is A Bond

A bond is a type of debt security. It is simply a piece of paper indicating a debt owing at a particular interest rate. For example if you buy a government savings bond, the government will issue a piece of paper indicating that they owe you money and they promise to pay you a particular interest rate until you cash in the bond. If you invest $1000, you will earn 3%, for example, on your money and you will get the whole $1000 back when you cash out, plus the 3% interest.The part many people don’t understand, is that there are many possible risks with bonds.

Did You Know?

There is a misconception that all bondss are safe, but there are really two bond markets out there. As with any investment, the bond you purchase will be a result of the risk/reward ratio that you can live with.

1. There is the retail bond market where individuals simply purchase individual bonds from governments or private companies.

2. There is a bond trading market, where people can buy and sell any of those retail bonds investors have purchased.

This raises the risk level of bondsbecause you are now exposed to interest rate fluctuations in the global economy.

Retail Bond Market

The retail bond market is basically made up of government savings bonds and private business bonds. The safety of your bond is decided by the stability of who you buy from.If you buy from a large, stable government or company, your risk is usually lower.If you buy from a weak government or a small and volatile company, you have raised your risk level.Government Savings Bonds:i.e. Canada Saving BondsRisk: It is considered a very safe investment. However, other government bonds have recently become very risky due to recent economic turmoil in various countries.

Keeps Its’ Value?

You are guaranteed a fixed interest rate. If you hold a 5 year Canada Savings Bond which pays 3% interest per year, you know what you are getting.Private Business BondsRisk: The safety of this bond is generally determined by the stability of the business you purchase from.Obviously, a riskier bond purchase is one issued by a barely solvent private business which pays you a fixed interest rate.Keeps Its’ Value? If you try to sell this bond to someone else on the bond market after interest rates have risen to 5%, then your bond will have lost value compared to new bonds which are being issued. On the other hand, you bond may have gained value if interest rates dropped since your purchase. This is the risk/reward ratio in action.Even though these investment grade bonds are traditionally seen as relatively safe and conservative investments there is still an element of risk.

Truly understanding bonds and bond funds is difficult for many people and it is easy to get confused.

Bond Trading Market

This is the market where investors can buy and sell bonds.Bond ETFs and Bond Mutual FundsDefined: A bond mutual fund or ETF is simply a collection of bonds. Risk: Higher risk. (That depends on the type of bonds held and what interest rates are doing.) Keeps its’ value? The risk with bond mutual funds or bond ETFs is that their values can fluctuate depending on interest rates.

You are truly at the mercy of the market.

The TWO Bond Markets

Understanding bonds and that there are actually two bond markets will help investors assess their risk/reward ratios.The two parallel bond markets are why the average investor needs to be careful when investing in bond funds instead of the more traditional individual bonds.They truly are not equal.Bond mutual fund and bond ETF values will fluctuate based on the fluctuation of interest rates.Whereas, individual bond values stay the same regardless of interest rates. However, the caveat of risk is that this only remains true as long as the company or government who sold them to you remains strong and can fulfill its’s debt obligations.

Understanding Bonds is Your Protection Policy

Understanding bonds takes a little bit of work, but it is critical to “get it” to keep your money safe.You don’t want to just buy bonds because someone told you it was a good idea. Instead, protect yourself, your family and your money and follow a system for identifying your investment selections.

 
REIT funds are a little known and under-used investment vehicle.It’s a good investment for beginners because these funds are easy to understand. They are essentially investments in real estate.However, it is not a direct investment in real estate. Instead, it is an investment in a company that manages real estate.

Tax Implications

REIT funds pay dividends to shareholders.These dividends are considered income. Thus, make sure you consider your tax bracket and your overall financial goals prior to purchasing this type of fund.

Management Styles

REIT funds are considered a less risky investment than typical real estate because a REIT mutual fund usually holds a variety of types of real estate. You can look at the mutual fund prospectus to see what holdings your fund has.They are actively managed funds except for REIT index funds which are passively managed (like all index funds).

Expense Ratios

REIT funds are good for income seeking investors.They have a high yield and help you diversify your investment portfolios. They also tend to be low cost.REIT index funds usually have the lowest management fees.

Redemption Fees and Liquidity

REIT funds are sensitive to interest rate changes and somewhat reflective of the overall real estate market.Sometimes, in order to discourage frequent selling of shares, some REIT funds charge a fee if you sell them prior to a year.Or, redemption of these types of funds can be denied during a recession or declining market.Be sure to check into your REIT funds’ selling fees and options.

What Type Of Account To Use

Because the dividends that are paid are considered income, there are tax implications. You may want to have your REIT mutual funds in a tax deferred account, so that your tax impact is minimized.A REIT mutual fund offers a diversified investment vehicle that can play a role within your portfolio. REIT funds will continue to be popular because of the income they can provide. Now, you can dabble in the real estate market without the risk and need to use large amounts of money.