Compounding results in the growth of money as a fundamental objective of earning returns, continuous investment on the return of my money initially invested, along with the initial money invested results in more returns. Compounding, therefore, works for both guaranteed and non-guaranteed investments. However, as a financially literate individual having gone through the principles of finance, I would be keen to understand that compounding interest can also work against me on failure to pay off debts such as those on the credit card balances. Therefore, I will identify three ways I can invest in my future based on the principles of finance while analyzing one of the three ways I feel will be the most confident way to invest, and also determining one of those three that I perceive will be the most challenging, and what I can do to overcome some of the challenges.
Investments such as saving accounts, bonds, and Guaranteed Investment Certificates (GIC), form safe and secure investments with very little risk since it is possible to determine how much money I may earn. However, there are other investments, such as mutual funds, stocks, and exchange-traded funds (EFTs), which may be considered as long-term building portfolios that earn significant returns. Thus, I would prefer to utilize long-term building portfolios for the sake of my future investment. An important consideration would be for me to identify any of the mentioned investment that would be registered in a retirement savings plan (RRSP) or a tax-free savings accounts (TFSA), such strategies would greatly enhance the elimination of taxes that I may pay on my future earnings. Firstly, as a consideration for my long-term investment, I would go for mutual funds, where the money is pooled from many other investors and invested in stocks, bonds, and short-term debt to form portfolios. Therefore, when I buy shares from the portfolio, which would be a representation of my ownership in the fund, it will then generate future income. Secondly, I would go for exchange trade funds, since they work much similarly as the mutual funds, although, listed on the exchanges and ETF trade shares throughout the day. Stocks, bonds, commodities, and a mixture of the investment type, however, the ETF’s are easily marketable securities, with associated price, hence easily sold and bought. Thirdly, I would go for individual stocks because of the reduced fees associated with them because of not paying for the fund company and their related expenses. Additionally, I would have control over the taxes because I am in charge when selling and can control the timing gains or losses.
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However, of the three investment decisions, I would feel confident to invest my money with the ETF as a way to buy and hold my long-term investment and building an effective portfolio. ETF’s have significant advantages over the mutual funds, with also a promise of the flexibility of the markets. Besides, the cost of ETF’s seems to be lower, since, I would not need to pay for a manager or broker to buy and sell funds, manage the inflows or outflows on my behalf. It means that ETFs have lower expense ratios as compared to other investment strategies. ETF’s have a further promise of liquidity characteristics in that the funds can be sold throughout the day. ETFs also tend to be tax-efficient and very ideal for holding in taxable accounts. Since shares are not sold often, they rarely generate a taxable distribution for shareholders.
The most challenging investment strategy of my choice is the investment on individual stocks, which would require me to think twice before deciding on the investment. It is possible to experience financial losses when investing in single stocks as compared to mutual funds and the ETF’s. The reason why it is risky is because of the thrill, emotions, and volatile nature due to the prices of the underlying stocks, thus, making the possibility to make irrational decisions on the investment. There is also a possibility that with the minimal financial experience I have as compared to brokers and mutual fund managers, there would be the possibility of me to mix my emotions of dollar expectations with my dollar invested, thus unsafe, exposing my investments to inadequate return.
Conclusively, investing in my future will be a significant financial decision that would considerably affect the financial state of my future life, even in retirement. Because of the compounding interest effects on investment, I would be required to go for long-term building portfolios that would significantly improve my future financial states, such as the utilization of ETF and mutual fund strategies to generate future income. However, I would take a precautionary approach when dealing with individual stock because of the high risk involved in losing the investment.
