It is good to be thrifty in spending, but most people often let their frugal approach to money management overshadow their nuance for investment. I like being frugal, but no savings account will ever give you’re a return on investment equivalent to what you would receive when you act on smart investment opportunities.
Frugality is about treading with caution, but some people tend to misinterpret it in the sense that they almost put nothing towards income investments. Being thrifty means that you try to capitalize on opportunities that help you spare a few dollars, and this could mean buying goods/service in bulk during promotions or acting during seasonal shopping events, such as the upcoming Black Friday.
Another interpretation could also be buying stocks when they are cheaply prices and selling them when the price goes up; this is what is famously referred to as the Warren Buffet way of investing. In the end, the result is that you will be able to add to your capital. However, when it comes to investing, there are what we call value traps, and there are also investment opportunities that appear expensive simply due to their attractiveness to investors.
In addition, some people prefer short term trading opportunities such as trading in binary options or Forex, in which they are able to capitalize on the day to day changes in exchange rates/stocks prices. One of the main reasons why some people opt for the short-term investment opportunities is because of the nature in which they are able to increase their invested capital.
Ryan Fox, a senior analyst at OptionsXO tells me that in some cases, it is possible for people to actually double their money in a matter of minutes trading binary options, but this depends on what type of options they choose. He said:
“For instance, if you start investing in binary options with $1,000 and you decide to invest $10 per position, picking 10 positions at a time, it means that at every opportunity, a trader has the ability to turn $100 into $180, assuming an average payout of 80% for each winning trade. However, this can only be achieved if a trader attains a win-rate of 100%, which is highly unlikely, but still possible.
Also, considering the fact that some option types give traders an opportunity to profit within 60 seconds, this means that it would take a trader less than 20 minutes to double his/her money given a high win-rate”.
Now, that sounds like merry to me, but just like several investment opportunities out there, there is a huge amount of risk involved, and thus, people must act with extra degree of frugality when approaching this market.
Now, for those who prefer the long-term investment opportunities, it is always good to pick out a mixture of investment vehicles. For instance, putting some of your capital in fixed income investment opportunities like government bonds and treasury bills, while at the same time allocating another chuck of the investment income to equity investments. With equities, there are several other opportunities, such as investing via mutual funds, private equity firms or hedge funds, where you generally let others manage your money. However, there is also the other option of trading the market yourself.
Trading equities requires experience and a good understanding of market forces and fundamental analysis. As I mentioned at the beginning, it is easy to fall into what investors refer to as value traps. This happens when the price of a stock appears to value the company cheaply compared to its peers in the industry indicating that the particular stock could be significantly underpriced.
However, in most cases it is not the case and many investors have been caught up in a value trap, thereby resulting to no value for money invested.
Nonetheless, from the point of view of frugal investing, dividend plays sometimes do the trick. Some investors do not buy equities for the sake of capital gains, but rather for the whole purpose of dividends.
A good dividend stock is characterized by a payout of not more than 65% of reported earnings, a decent growth rate of between 3%-5%, and an impressive dividend yield of at least 3%. AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) are some of the best dividend paying stocks in the market with forward and trailing dividend yields of more than 4%.
In any case, it is also much easier to value companies that pay dividends from reported earnings than valuing companies that have no profits in their books. Generally, when the price of a stock increases without an equivalent increase in dividend paid, the dividend yield decreases. As such, high dividend yield is also another way of determining whether or not a stock is cheaply priced.
As you can notice, both Verizon and AT&T operate in the telecommunications sector. Stocks in operating this sector tend to do well regardless of economic conditions simply because communication is an essential service to people.
Other sectors that tend to do well and thus pay impressive dividends are the energy sector and the real estate stocks “REITs”. However, this may not always be the case as demonstrated in the last twelve months where for some reason; the market appears to have handpicked the energy sector for some thorough punishment as depicted by the declining prices of oil and gas.
The bottom line is that exercising frugal measures when spending is a fantastic idea, but this does not imply that you squeeze all the money from investments during volatile market conditions. Seasoned investors will tell you that when everyone is selling, or running away from the market, then it’s time to buy/invest.
Being cautious is important though because not every investment opportunity appealing or otherwise is what it appears to be during such times. As such, instead of using your frugal instincts to pull all the money from your investments, you can apply frugality in handpicking safe investment vehicles. You can also use the same techniques to identify reliable short-term investment vehicles like binary options and forex where you can turn profits by the minute.