By Luke Sampson
Choosing a solid portfolio of investments and then monitoring how effectively they perform is essential for those who are serious about achieving impressive results, particularly if they have invested a sizable amount. For example, it is a good idea for workers that are home based, freelance or self-employed to think about developing a personal investment portfolio to provide future financial security. Even if a home based worker is contributing to a simplified employee pension (SEP) plan, retirement income is a more difficult issue for self employed people, and such a portfolio can be an ideal way to make up this shortfall.
There are, of course, several options available and it makes sense to assess the risk levels and potential rewards of each, rather than plunging all available funds into just one asset. When investing from home it is particularly important to gain a comprehensive market overview and to take specialist advice if needed from different online sources, such as contributors on TheStreet.com to financial analysts on major news websites. Here are some of the most popular and best performing options for those seeking to build robust financial holdings.
The purchase of stocks, also called equities by financial advisors, means that the buyer becomes a part owner (shareholder) of the business they have bought into. This allows the investor to receive a share of profits that the company distributes and entitles him or her to vote at the AGM of the company. Distributed profits are referred to as dividends.
Stocks are by their nature volatile and market forces can cause prices to fluctuate on a daily basis. They don’t come with guarantees, nor do they always pay dividends; however, they can increase in value over time (growth stocks) so that it’s possible to make a profit on them even when dividends are not paid. Potential returns, on the other hand, are relatively high and that is what attracts so many investors.
Working from home often means a welcome degree of flexibility, so that stocks could be purchased and held for some time, with regular monitoring of the value, possibly offering a long-term return. Day trading, on the other hand, means buying investments with the aim of turning over purchases at a low price for sale at a higher price on the same day. Engaging in day trading from home is an option that is likely to have limited suitability unless a self-employed person actually wants to become a freelance day trader, as it is time consuming and involves some fairly sophisticated software and a good deal of practice.
Commonly, a bond refers to securities, specifically fixed-income securities that are founded on debt. By purchasing a bond, the investor is effectively lending money to a company or a government, depending on the type of bond. In return, the organization agrees to pay interest on the money and to repay the amount of the bond plus the interest at a given date.
It has to be said that the relative safety of bonds is their main attraction, particularly when bought from a stable government, in which case the investment is more or less risk-free and virtually guaranteed. However, because of these safety and stability factors, the rate of return on bonds is generally lower than on other types of securities.
One advantage of bonds for freelance workers is the lower level of risk, however, this must be balanced against the accompanying lower level of returns, which can be disappointing.
Buying into a mutual fund means owning a share of numerous stocks and bonds held by the fund. An individual’s money is pooled with funds from a number of other investors. The best-known mutual funds are unit and investment trusts. The fund will have a professional manager who will select specific securities on behalf of everyone. Generally, mutual funds are set up according to a specific strategy and with a distinct focus. This can be almost anything – large or small stocks, government bonds, commercial company bonds, investments reflecting particular industries or certain countries, etc.
One particular advantage of a mutual fund is that you have a professional advisor who is competent and knowledgeable and who will make informed judgments about investing funds. They have the time and the experience needed to choose sound investment opportunities. In theory, therefore, professional management of mutual funds should result in improved returns; however, for those who are attracted to this type of investment, it’s important to be aware that mutual funds have not always delivered. Returns can fluctuate and the US government does not guarantee mutual funds.
That said this is a relatively easy investment sector in which to trade if you are working from home, as unlike the foreign currency exchange markets, for example, it does not tend to fluctuate wildly or require constant monitoring and maintenance. Also, the return on a long-term investment from mutual funds is likely to be greater than on lower risk bonds.
Other investment possibilities
Stocks, bonds and mutual funds cover the basics of investment options; however, there are slightly more complex alternatives for those who want to gain a comprehensive overview of current market conditions and available choices. These include forex, futures, real estate and gold. Often these are high-risk strategies, but they can deliver substantial rewards, as they are more speculative than traditional stocks and bonds. The drawback for self-employed people is that they tend to be time-consuming to maintain – a commodity that is often in short supply for those working from home.
As an example, forex is the foreign exchange currency market and is one of the largest and most fast-paced markets in the world. Although once the province of larger financial institutions, such as banks, today forex is often considered to be easier to understand than the stock market, and individual investors can buy and sell currencies from the comfort of their own home. Again, knowing the market is key to getting a good return; so following the progress of, for example, the dollar against other currencies is essential.
Most currency movements are relatively small, so leverage plays a significant role, and the speed of transactions allows for fast trading and minimum market manipulation. In this market, supply and demand is in charge and the market is open for 24-hours, so it suits night owls as well as early birds. Bear in mind that these alternative possibilities can swallow up a lot of precious time, which, for freelance workers may be to the detriment of pursuing core business opportunities. It is necessary to add a warning that currency trading can be a way to lose a lot of money very quickly. A lot of research and monitoring of the market is essential and a tyro should run a practice account without investing anything for some time before committing any funds.
Overall, there are lots of great investment opportunities available for those who are keen not to leave their hard-earned cash languishing in a savings account paying pitiful interest rates. Even when self-employed workers are contributing to a SEP, starting an investment portfolio may well offer additional financial security in the future. Having a well-diversified portfolio doesn’t necessarily mean simply buying more than one type of bond or stock; it can mean branching out into new areas of investment as a viable alternative.
About the Author: Luke Sampson is a freelance writer specializing in financial advice and the investment world. He is currently focusing on writing about the road to successful long term investments, and busting some of the jargon associated with this issue.