_The greatest mistake of the American saver is to invest unwisely._ It is estimated that over three billion dollars have been unwisely invested in fake or questionable oil stocks alone in recent years. Despite precautions, a billion dollars a year is at present dissipated in “cat and dog,” or worthless, stocks.
The reason is that the American _is an inveterate chance-taker_. He carries this principle with him in handling his investments, and does not realize that it has little place there. Investment for the ordinary man should be Grade A and Grade B and C risks exclusively; never grades D, E, F or greater risks. A Grade C investment is quite “chancy” enough; a Grade B is more reasonable. Grade A is safe. Naturally the yield is lower on Grade A investments, but sometimes there is no yield at all on lower grades!
Contrary to general belief it is not necessary to put off the pleasure of being an investor indefinitely for lack of a large surplus.
The greatest fortunes have been founded on a steady and consistent accumulation of capital, starting with extremely small sums. Much larger sums than it took to start these large fortunes have been lost by individuals endeavoring to get rich too quickly.
Any sum is a start--even a dollar. There are now many banks which will gladly open a savings account with one dollar. _It is not the amount but the systematic method that counts._ The savings bank is the natural first field of action for savings--especially on a regular deposit plan. It is only when the sum gets to $500 or $1000 that “investment” of a different kind should be considered--and then it should be _government bonds_. The saver should write a letter to his banker or broker, and enclose an order to buy “at the market” government bonds (any issue) for the sum he has ready to invest. The saver cannot go wrong if he does this.
The following might be regarded as a general schedule of instructions for savings investment, based on the amount of total available savings:
If you have from $1 to $100, _put it in the savings bank at 3% or 4% interest_.
If there is no savings bank available, use the Government (Postal) Savings Stamps. Inquire at your post office.
If you have from $100 to $1,000, buy Government bonds, Treasury Certificates, Liberty and Victory issues, etc.
If you have $1,000 to $5,000, consult your bank and buy high-grade bonds of various kinds.
If you have $5,000 to $10,000, consult a conservative investment banker, and buy a _diversified_ line of securities; bonds, higher grade preferred stocks and some high-grade, dividend-paying common stocks, if general business conditions are not at a high peak or inflated.
If you have more than $10,000, select most carefully a very capable banking house which will not endeavor to sell you many of its own special issues, but will properly diversify, on a still wider scale, your stocks and bonds; selecting a still wider range of industries, and purchasing more preferred and common stocks of well known, stable successful industrial, railway and public utility companies. Have them pay particular attention to common stocks of such companies, for about 20% or 25% of your total investment.
Liberty Bonds and Victory Notes have the highest investment rating in the world of finance; they are more gilt-edged than any other bonds ever issued by nations or corporations; they even come ahead of British Consuls and French Rentees, which, prior to the World War, ranked foremost among investments. The owner can always borrow on U. S. Government Bonds, if borrowing becomes necessary.
Among all the securities one could buy none rank so high nor are so convenient from the point of view of marketability, ease of liquidating, and collateral value as good bonds. One need seldom take a loss in good bonds through forced selling. There is little fluctuation.
It is better to hold gilt-edged bonds, the kind banks lend money on. These usually consist of U. S. Government bonds or a certain class of high-grade corporation and railroad issues that have been passed on by the savings banks. Others are so highly rated as to be eligible for trust funds, and a medium for the conversion of inheritance funds, insurance funds and the like. You can buy short-term issues if the money may be needed in a few months or a year or two; otherwise select long-term bonds. Then hold them and continue to do so. When you need money borrow on them, even to buy other sound securities like gilt-edged preferred stocks and the best-rated common stocks. You need never part with your original investment in bonds if you follow this suggestion.
Securities in general may be rated in their order of investment merit as follows:
_Bonds_ A. “Gilt-Edge” bonds B. High-grade bonds C. Medium-grade bonds
_Stocks_ A. High-Grade preferred stocks B. Medium-grade preferred stocks C. Speculative preferred stocks B. High-grade common stocks C. Medium-grade common stocks D to Z Speculations
The shrewd buyer will always discover some bargains if he will do his shopping on the common-sense principle that it does not pay to wait until everybody wants the same goods at the same time. The saver will do well to sharpen his own knowledge of investments.
He should pick up his bargains in the off-season, place them in “cold-storage” and only lighten his load when everybody wants them at once, at any price, and for immediate delivery. There is no better way of determining when the bargain season is on than by watching the daily newspapers. Never buy preferred or common stocks when business is in a period of inflation or at a peak of prosperity. The time to buy is when conditions are at a lower ebb, when the stocks of absolutely sound companies are selling cheaply. It is good advice to buy only stocks listed on the New York Stock Exchange--the list of which is printed and quoted every day in leading newspapers.
Bonds often go up when stocks go down. As a general proposition any bond which is a direct mortgage, on property valued largely in excess of the bond issue--where the issuing corporation has shown its ability to meet interest charges, year in and year out, by a large and ample margin--is a good bond.
It is difficult, however, for the average business man to investigate the value of the underlying securities, to judge them even after lengthy study, or to decide whether a particular mortgage is “clear-cut,” without reference to mortgages preceding or following it.
Also, no ordinary man is competent to pass upon the legality of an issue or the titles back of a mortgage. This requires a complete battery of specialized talent, especially in the case of corporation and railroad bonds. Such information is always on hand with your banker or broker, and if you ask his advice he will always be glad to assist you.
It is well to rely upon the banker who makes a business of investments--but he should be a conservative banker of good repute. Always, without fail, investigate your banker. Be suspicious of lurid advertising and follow-up. As a general rule the higher the interest yield the more risk the investor takes. Don’t be greedy; be content with moderate return _and safety_.