I’ve constantly heard that if you make or receive large amounts of money, that you should invest in stocks and bonds. But stocks, compared to just putting your money in the bank, are relatively risky. Sure, I’ve heard of people who invested wisely and are worth multimillions. I’ve also seen plenty shows of celebrities who went broke due to bad investments. So, even if a bank doesn’t pay as much interest, still, about the only risk I can think of is, at least in the US, if money gets stolen from your account, the FDIC only insures $100,000 of it, but that still seems less risky than investing in stocks, right?
So why is, what is essentially gambling, better than playing it safe?
When you get a lot of money you can spread the money over a wide range of stocks; putting 50% in safe stocks (microsoft, barbie… you know, the constants that will never go away), 30% in mid range risk , and 20% in medium-high risk stocks ( new, promising, business that just became publicly tradable). That way you are almost guaranteed a net gain (as long as you buy low and sell high).
Of course, you do not want to put all of your total money into the stock market, so C.O.Ds are always a good thing (about 7% interest over X years).
Methinks you need a lesson in basic finance. Generally speaking, with higher risk comes higher returns. So that’s the dilemma that faces investors. However some of the risk can be offset by investing for the long term and by diversifying your holdings. Oh, stocks and bonds are not the same thing. For the most part bonds carry less risk but provide lower returns than stocks. Unlike money in a savings account, however, bonds are less liquid. All of this is a very broad treatment. I’d recommend that you pick up a book on personal financial management and dig in. A fascinating subject.
The simple problem is that standard bank interest rates do not usually keep up with inflation so you are slowly loosing money by parking it there. As to investments, you pick your level of risk with a generally coorelated rate of return. Some people, like retirees are very concerned with losing money in a market downturn. A popular option for them is to buy a series of bonds. Bonds pay a higher rate of return than bank deposits and are rated to the amount of risk. Again, more risk generally = higher returns. You have to to find a balance that meets your needs. Stocks are generally more aggressive than most bonds. However, not all stocks are created equal. There are extremely risky stocks like technology and biotech startups and then there stocks like Blue Chip stocks for large, stable companies that are much more conservative. You can set up your investments to be very conservative all the way through very aggressive. It depends on your risk tolerance and your time horizon to allow you to recover from a short-term market downturn.
oh yes, buy a book on Economics. In one of the chapters it should tell you the pros/cons of each type of money gaining technique; then you can judge for yourself which is the best course of action for your personal financial situation.
These sorts of problems come about when you are foolish with your money and invest unwisely. Smart investment techniques protect your wealth while allowing you to earn a good return.
Diversification is the most important step in smart investing. As the old saying goes, don’t put all your eggs in one basket. Investing in a small number of securities is very risky. You might make a lot of money, you might lose a lot as well. Thing is, you don’t get a higher expected return by buying one stock than if you buy 100 similar stocks. Buying 100 stocks gives you the same expected return, but a much reduced risk of losing your shirt. Where one company can crash and burn, it’s very unlikely that 100 will at the same time. If you can’t diversify by buying individual securities, buy mutual funds, that’s why they exist.
Second is risk management. You choose a portfolio of securities that maximizes your expected return while maintaining the desired level of risk. Stocks are generally riskier than bonds, so they command a higher expected return, you get paid for taking on that risk. Bonds tend to be less risky, so they don’t pay what you expect stocks to pay. Government bonds are less risky than corporate bonds, they pay less. Having money in a bank account is safe AND convenient, you get paid the least of all.
If you are not taking on risk when you invest, you won’t earn any money off of the investment.
[QUOTE= I’ve also seen plenty shows of celebrities who went broke due to bad investments. [/QUOTE]
That wasn’t so much investing as it was “buying crack”.
As others have said, and from my reading, etc. on the subject, over a long term horizon, investing in the stock market in a diversified fashion will result in a higher return than sticking your money in a savings account. Many who lost everything were highly invested in a specific sector or particular company. For example, if everything you owned was invested in two or three of the dot coms or in Enron, or in Canada, in Nortel, well, you’d be screwed.
Also, other general advice will tell you that most individuals who try to buy and sell shares themselves trying to capture a quick buck will not be successful. Instead, if you are in the position to have a longer term investment horizon, say you’re in your 30s and are saving for your retirement, buy a diversified portfolio, and hold. The odds are in your favour to come out ahead of someone who is daily buying/selling shares.
Or you could just buy Berkshire Hathaway and rely on Warren Buffet. (Not that I’m giving advice. 
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Oh, and one other factor. In Canada at least there are different tax implications. Any interest earned on a savings account will be fully taxable as interest income. This is taxable at a higher rate than wealth acquired through stocks.
In my estimation, extremely rich people invest in:
land / real estate
private businesses
art
precious metals / precious stones / jewelry
philanthropy (not an investment, but a place to toss excess money and feel good about it)
blue chip stocks (maybe 10% of their money, just so they can say they own stocks)
municipal bonds (tax free interest)
Now, back to the OP.
If I was to receive a LARGE windfall, here’s what I would do:
(1) Set up annuities for all my bothers and sisters so they get a check every month.
(2) Estimate how much I will need to survive until I am, say, 75 years old and deposit that much into something like CDs. Something with low interest and very low risk.
(3) Subtract items 1 and 2 from my total, put 30% of the remaining balance in my fun-fund (for travel, etc.), and the remaining 70% in tax shelters (muni bonds, etc.)
(4) No need to buy stocks, you wouldn’t need to take that kind of risk.
IMHO of course.
Yes, all casinos work that way. 