Emergency funds are funds which are set aside by a saver for, as the name suggests, emergencies. They are designed to cover unforeseen expenses which may occur in the future and which someone has not planned for covering.

There are many situations when an emergency fund might be necessary for someone. Sudden medical catastrophes, natural disasters, legal actions, or unanticipated needs to travel, can all have a serious impact on someone’s finances. Most people who do not have an emergency fund already set aside for cases like these need to take out new mortgages with high interest rates, or dig into their retirement or other savings funds—something that nobody should ever do.

The solution is saving for an emergency fund. This offers several benefits to the saver, including:

-Peace of mind in day-to-day life. You never have to worry about the “what-ifs” if you have an emergency fund, because you will already be prepared for them.

-Money for emergencies. You won’t need to deplete your retirement fund or other investments in case of an emergency, and in case you don’t even have those funds, you won’t be completely out of luck and unable to help yourself.

-Interest-gathering investing. Waiting for an emergency to happen and then taking out a mortgage or other loan causes you to have to pay back interest on the initial loan. On the other hand, if you have an emergency fund set up, your money gains interest over time up to the point that an emergency occurs that necessitates using the fund. If such an emergency never occurs, not only did you prevent needing a high cost loan in the future, but you actually added to your retirement savings.

So how do you invest in an emergency fund?

First, you need to make sure that you buy a stable investment. Stocks may be appropriate for long term investing like that which occurs in retirement planning, but you never know how soon an emergency might occur so an emergency fund should not consist of investments which fluctuate greatly in price. A combination of a savings account, bonds, precious metals, and Certificates of Deposit are all ideal for putting into an emergency fund.

Second, consider purchasing insurance. There is insurance available for personal liability, major medical catastrophe, unemployment, and so on. These can add to your payable funds in the case of an emergency.

Third, ensure that you can readily liquidate whichever investments you purchase. If you purchase bonds, for example, they may be stable but some smaller government-issued bonds like those available from Canada and Israel can only be cashed out at certain times and are non-transferable. These are not ideal for emergencies.

Annuities Explained

Annuities are a financial instrument offered by many insurance companies. They are basically a guaranteed investment indexed to certain investments made by the company from which the annuity is purchased. In short the annuity company will either pay you guaranteed annuity rates or base your investment on other types of securities like stocks, bonds, mutual funds, mortgages, or a variety of all of these and possibly other investments as well. Annuities offer a regular, often guaranteed-minimum income to the holder after a certain date, indexed to the aforementioned investments’ performance.

Mutual Funds Explained

Mutual funds, on the other hand, consist of units of a fund which is invested in stocks, bonds, and cash by a qualified manager. They are usually provided by banks or independent fund managers, and the institution providing the mutual fund may charge an annual fee to the holder, take a commission out of the mutual fund itself for managing it, or charge a trading fee, or a combination of any of these.

What’s the difference?

Both annuities and mutual funds are similar in that their payouts are indexed to underlying investments. The difference between the two investments is the coverage period.

An annuity is a sort of reverse life insurance policy. You pay into it while you are alive, and once you retire, it guarantees an income (based on specified annuity rates) for fixed periods of time until you die. The issuer of the fixed income annuities are betting that you won’t live a very long time so that they can keep more of what you paid into the annuity fund, so if an insurance salesman after looking at you is anxious to sell you an annuity over other products, perhaps it’s time to consult a dietician.

A mutual fund, on the other hand, is physical property which you own in the form of a security. It continues to exist, regardless of whether you are living or dead. On the other hand, there is no guaranteed minimum payout like you may get with an annuity.

So which is better?

Both annuities and mutual funds have their respective benefits and each person may find one more appealing than the other.

One of the major things to consider is investment expertise. Do you know what you are getting into when purchasing a mutual fund? Do you know how to evaluate the stocks it holds to see whether you’re buying a stable fund? If not, an annuity might be for you.

On the other hand, do you have a family to look out for which you wish to be provided for once you are gone? If so, a mutual fund may be preferable because it survives even after the holder dies, and is a part of the holder’s estate.

But the market is currently hectic due to the recession (or depression as many of us argue), and you have no idea which companies only exist because of temporary government subsidies, and which companies will be able to weather the storm and grow your money over the long term without going out of business.

Fortunately for you, there are a few sectors with excellent equities available on the market. Here are some suggestions for where to look for companies which will continue to grow despite the economic downturn.

Precious Metals

Because of the rapid inflation occurring in many of the world’s central banks, precious metals are more in demand than ever, and will be for years to come. This makes gold and silver mining companies perfect opportunities to invest in, and there are some great junior mining companies with low P/E ratios available on the market. Two companies which come to mind are Northgate Minerals and European Goldfields.

Food

Many things may be purchased less during the recession, but food is not one of them. There will always be a consumer demand for food and beverages, and food stock levels are at a low for recent years in the United States due to all of the producers which have gone out of business. This means that any company still standing is likely to move in to fill the void and make a profit. Produce companies like Chiquita Brands International and Dole may be worth looking into as well as a catalyst to drive sales in a down economy. If you can’t find anything domestically, check out foreign companies like Switzerland’s Nestle, or Japan’s Asahi Breweries. Even first level producers like Norway Pelagic, which is a fishery, offer decent dividends and growth.

Oil

Though there is a “green” energy craze occurring, the world is still going to need oil for the foreseeable future since newer technologies are still inefficient and are only purchased for ideological reasons or because they have been artificially decreased in price by temporary subsidies. Check out the major oil companies, like Valero, North America’s biggest refinery.

Forestry

Not every company has stopped building, and there is still a demand in the forestry sector. However, a lot of it has moved into developing economies like Asia. The Hong Kong and Shanghai exchanges have some excellent offers, and there are even some Chinese companies listed on the American or at least Canadian exchanges like Sino-Forest Corporation which may be worth looking into.

Chemicals

There is still a demand for chemicals, even if domestic producers are producing them inefficiently. Developing economies like China may have good offerings, but even more developed economies like Europe offer this. Check out Germany’s Henkel, which has some excellent dividends and makes long term demand products like Loctite and Dial soap.

Stocks—Value Investing

Value investing is one of the safest ways to invest in equities while ensuring a massive return over time. It has been used and time-tested by investors like Warren Buffett and Benjamin Graham, with great results.

The idea is simple: Ignore all of the technical charts of a company’s market price, since they mean nothing. Instead, focus on the basics as though you were buying an everyday business, because that’s exactly what you are doing when you become a shareholder.

Look at the balance sheet of the company. Is it earning well? How has it earned for the past five or ten years?

What about the product the company sells? Is it really a stable product to be selling? Consider that plenty of tech stocks were booming in the late nineties, simply because of the credit bubble which had formed, but that in a normal economy, nobody would need them. On the other hand, a company whose sales consist of the basics like food, oil, and metals, is usually a much more reliable long term in investment.

After determining that a company sells a needed product and has been competitive for a long time and will be in the future, and has a record of positive earnings, look at the book price, which is the actual value per share of the company that a stockholder would get if the company was liquidated today. If it is less than the market price, or only slightly above when one considers the current earnings per share, it is likely a good buy and it will maximize the return on investment over time.

Mutual Funds—Value Investing

Mutual funds don’t require much explanation. Since they usually consist of mostly equities, it is important to apply the same value investing principles as when purchasing stocks. Examine the holdings of the mutual fund, and if there are too many overvalued stocks in the company compared to the fund price, you should avoid investing money in the fund.

Bonds—Real Return

Cash is rarely a good way to hold currency these days because it is no longer backed by gold or silver, so it is subject to inflation and a loss of its value over time. People often buy bonds because they are stable and give a set interest rate, but they don’t realize that if the inflation rate varies, the bond’s interest varies in a hidden way.

For this purpose, it is advisable to purchase real return bonds. Real return bonds are adjusted for changes to the CPI, and therefore their interest remains constant since it is based on the real original purchasing value of the bond.

But is this enough to retire with? Inflation has severely reduced the value of social security payouts which have been under-indexed to the rising CPI, and the same can be said about private pensions. In some cases, businesses have gone bankrupt and pensioners won’t even be able to rely on a devalued payout from the pension when they retire because it no longer exists.

So what’s a soon-to-be retiree to do? Here are a few tips for people who find their selves investing late for retirement.

-Don’t overcompensate. If you take too much out of your budget to invest in your retirement portfolio, you may have to pay fees to quickly withdraw from it again due to the lack of enough expendable current income.

-Don’t put your money all in one place. The old adage, “Don’t put all your eggs in one basket,” is commonly known but equally commonly ignored. If you put everything in the “next best thing,” you can wipe out all of your savings quickly and end up having to return work.

-Take advantage of tax sheltered plans. Individual Retirement Accounts allow for tax advantages to individuals who use them. Don’t forget to consider the advantages of the two main account types: A Roth IRA can be used to invest with no tax break now, but no tax when cashed out in the future, while a Traditional IRA allows tax deductibility from the current year’s income with the money being taxed when withdrawn in the future.

What to Buy

An investment advisor may be the best person to advise you on what to actually put into your portfolio, but here are a few suggestions.

-Stocks. Stocks can grow both on equity or a dividend basis, or both. The main purpose of getting stocks is that they represent a board of businessmen fighting to improve the value of your holdings, provided you buy into a good company. These come with risk, so don’t hold your entire portfolio in stocks.

-Bonds. Bonds are guaranteed when purchased from the right issuer, but they may offer low returns, particularly due to the low interest rates set by central banks right now. Make sure to buy them in low inflation currencies like the Swiss Franc or the Japanese Yen, as the US dollar may depreciate faster than the interest accumulates on the bond.

-Precious metals. Precious metals can act as a hedge to inflation and are easily liquidated. Many banks can sell you these, but if not, check out www.kitco.com to mail order it.

Hopefully you now feel more confident about your retirement. With a few sacrifices now, you will be as well-off later as if you had started planning for retirement at age twenty.

To answer this question it is important to remember that being realistic is the key to investment success. Many will buy investment products but use such a large part of their paycheck in doing so that they cannot pay for other costs such as electricity bills, food, and so on, and they end up having to quickly resell what they intended as a long term investment.

Consider a scenario where an investor researches an excellent equity or mutual fund and decides to spend 35% of their paycheck on investing in it. This investor has to spend, say, $30 each way to make their trade with their broker, but they consider the price well worth it as they expect their investment vehicle to rise significantly over the next few years.

It seems like a great investment idea to save a lot for the future, but the investor realizes soon after the investment that they need 80% of their income to pay their bills and purchase necessities rather than the 65% they have left after purchasing the investment.

So what does this investor do? He or she decides to resell a large portion of their investment in order to get money to pay the bills. This means they spent sixty dollars in unnecessary commissions. Perhaps the stock also lost value in the short term, as well, and the investor lost another fifty dollars. It doesn’t take a genius to realize that constantly buying stable long term investments and selling them within the week can be foolish. This principle applies to not just stocks and mutual funds, but any investment which involves a commission.

The best way to come up with an investment budget, therefore, is to first determine all of an investor’s living expenses, and then split the leftover portion of a paycheck into three parts: Emergency funds, recreation, and investments.

First, set aside some money to cover job loss, potential medical bills, or any other disaster. You should set aside a portion of your leftover money in case a catastrophe occurs, leaving it in an FDIC-insured bank account.

Second, budget a portion of your leftover income for recreational expenses. Don’t invest only to discover that you are going to go into debt to cover your expenses for fun.

Third, invest whatever is left. This is your money to use towards your investments, free and clear of any worries about needing it for future financial obligations.

If you follow this rational approach to creating an investment budget, you will be able to grow your money over the long term without having to constantly worry about digging into it.

There are two types of investing related to equities: Long and short. Long selling means that the trader is buying the stock and holding it. Short selling means that the trader is selling shares of the stock which the seller borrows from someone who holds the shares, with the intent to cover the short sale of those stocks at a lower market price in the future.

The difference between the two sales is that an investor who goes “long” believes the stock will be bullish, while an investor who goes “short” believes the stock will be bearish. An investor who goes “long” has no future obligations because they own the shares they purchased, while an investor who goes “short” has to repurchase the same amount of shares they sold in order to return them to the person they borrowed them from.

If a share price goes up, the short seller loses money, whereas if it goes down, the short seller makes money. Here’s an example of how short selling works:

Assume Joe Trader thinks the price of Widgets Incorporated on the Imaginary Stock Exchange is going to plummet in the next few weeks. Joe decides to sell 10,000 shares of the company at $1 each, which puts $10,000 into his portfolio, and makes Joe liable to purchase 10,000 shares in the future to cover his short sale. It turns out that Joe Trader was correct, and Widgets Incorporated drops down to $0.40 per share. Joe purchases 10,000 shares at the new market price of $0.40 each, for a total of $4,000. The amount he originally sold the stocks for ($10,000), minus the amount he had to pay to cover the shorted stocks ($4,000), comes to $6,000, which is Joe’s profit on the trade.

If, however, the stock price shot up to $1.50 and Joe got nervous and had to cover it, he would end up paying $15,000 to cover 10,000 shares at the market price of $1.50, and would have only originally gained $10,000. This would result in a loss of $5,000 for Joe, but a trader who went long on the same trade Joe shorted would profit $5,000.

Remember, short selling can be risky since the investor does not actually own the shares that they sell and is therefore not able to weather unforeseen market fluctuations like someone who goes long. Make sure you only short a stock if you have enough money to cover it at a loss without going into severe debt.

So what exactly is margin trading? Margin trading involves purchasing stocks on credit from the trader’s broker rather than with the funds a trader already has in his account. The margin trader uses equity or cash in his account to “leverage” his portfolio by using it as collateral to invest more cash than he actually possesses. Most brokers have a few requirements:

-Creditworthiness. A credit check is often run on prospective margin traders to ensure that they can pay their debts. Make sure that prior to applying for a margin trading account, that you don’t have any outstanding debts which you have failed to make payments on.

-Suitability for the trader. Brokers will want to know that you aren’t getting in over your head. Build up some time on a cash account basis first so that you have some experience to fill out on your trading profile and the broker will be willing to give you the higher trading level of “margin.” Otherwise, they may want to stick you in a cash account first prior to letting you make riskier trades.

-Minimum opening balance. Because margin trading would be useless without being able to cover the commissions, most brokers require a minimum balance to trade on margin. This can range from $1,000 to $2,500 or even higher depending on the broker and the region’s exchange regulations, so make sure you have enough to meet the minimum opening requirement.

-Initial margin. You must initially have a minimum of 50% collateral for your margin trade within your account, as required by law in US trading accounts. Your broker may require that you have even greater collateral when you initially purchase the stock.

-Maintenance margin. Under US law, you must maintain at least 25% collateral for the stocks you hold on margin, but as with the initial margin, brokers may increase this requirement.

The creditworthiness, trader suitability, minimum opening balance, and initial margin requirement are all fairly straightforward, but what happens if the stock falls and the trader meets to meet the maintenance margin requirement?

Failing to meet the maintenance margin means that there will be a “margin call” by the broker. The broker will force you to sell the holdings you have to protect against complete loss, and you will have to cover the losses by paying back the broker.

Remember to ensure that your stock is not so volatile that you could quickly fail to meet your maintenance margin requirement and be forced to cash out prior to the upswing of your investment. This will protect you against constant losses and no gains.

Dividend Stocks

Dividend stocks are shares of companies which focus on paying out a share of their income to investors during given time periods.

Pros

-Dividend stocks often come with less risk attached to them, because the board of directors pays out many of the earnings to investors rather than risking them on new investments.

-Dividends are useful to have coming into an investor’s portfolio if the investor wishes to diversify, because they can reinvest the dividends elsewhere.

-Dividend stocks often allow for the investor to enroll in a Dividend Reinvestment Plan (DRIP), which automatically uses the dividends to purchase extra shares of the stock at a discount, giving the investor greater ownership of the company and greater dividends over time without having to pay extra commissions to their broker each time more shares are purchased.

Cons

-Dividend stocks are often more conservative companies, so there is less of a chance for aggressive growth in equity over s short period of time.

-Paying out dividends prevents companies from using that capital to reinvest in more profitable enterprises which may increase the equity of the stock even more over time.

-Companies may pay out dividends just to maintain investor confidence, even if their sales are poor, making it possible for them to go into debt.

Growth Stocks

Growth stocks, unlike dividend stocks, focus on reinvesting their dividends and growing the equity value of the company’s shares by doing so.

Pros

-Growth stocks are more likely than dividend stocks to show aggressive periods of fast growth due to their reinvestment of capital.

-Companies with good boards of directors may be able to reinvest their earnings better than if individual investors used the earnings to purchase other shares. Berkshire Hathaway, for example, does not pay a dividend and instead lets Warren Buffett reinvest the money and sees excellent returns as a result.
Cons

-If a board of directors is incompetent, makes the wrong choices, or simply is wasteful, capital which may have been paid out as dividends to investors could be simply wasted on bad investments or corporate perks.

-Investors cannot use the earnings from some shares that they hold to invest in a new equity somewhere else on the market.

Summary

There is a clear distinction between solely dividend-paying stocks, and solely growth stocks, but sometimes it’s possible to get the best of both worlds. This is common in foreign companies, particularly European ones. Switzerland’s Nestle, for example, and Germany’s Henkel, both focus on moderate growth while paying out a high annual dividend (five to ten percent) to their shareholders.

The most important thing to keep in mind is the quality of the business’ management rather than how its profits are divided. Only then should you consider the debate over dividend versus growth stocks.

The Internet or in Person?

First, how do prefer conducting business? Internet brokers offer some of the best deals, but do you have trouble with using the Internet or do you worry your computer is not secure against data theft? If so, you might want to go to your local bank or a brick and mortar investment dealer like Charles Schwab for your brokerage.

If, however, you are comfortable with working online or prefer doing your investments from the comfort of your own home, the Internet is probably right for you. Most banks with their own brokerage firms also offer online brokerage services, and there are plenty of solely online brokers available as well.

Investment Options

What are you looking to invest in—stocks, bonds, or mutual funds? Maybe you want to get a bit exotic and trade in futures or hold precious metals like gold or silver.

Make sure prior to opening an account with a brokerage firm that they offer all of the investment varieties that you wish to purchase. Of the independent brokerage firms, for example, only a few firms like Questrade and Euro Pacific Capital actually deal with bullion. Otherwise, banks may be your best bet for bullion.

Additionally, for foreign stocks (not ADRs, but stocks actually listed on foreign exchanges), most online brokers cannot help you. If you’re interested in investing overseas, the in-house brokerage firms offered by larger banks are likely your best bet.

Price

Are you going to be making many trades or only a few? Do you require many investment options or just stocks and options? Do you require extensive broker-assisted trading or are you able to get along by yourself?

The price of a brokerage’s commissions is often directly related to the services it offers. If you can get along fine with less choices and no broker-assisted trading, you can pay fairly good commissions. Check out online brokers for the cheapest trades.

Minimum Opening Balance

Something to keep in mind when opening a brokerage account is how much of a balance you intend to hold in your portfolio. Lower prices and higher minimum balances often go hand in hand, since brokers can make some money off of reinvesting your free cash. OptionsXpress has no minimum opening balance, for example, but generally charges about $15 per trade.

Interactive Brokers, on the other hand, has a $10,000 minimum balance but offers trades at about $1.50 each. The customer service is also fairly barebones, which allows them to keep their prices so low.

Conclusion

Hopefully this has given you a few ideas on how to choose a broker. Just remember that if you don’t like one, it’s not the end of the world as you can always transfer to another for a nominal fee.