Investing = Good Idea

[fazzle]

Its all about the Benjamins... or so some people have told me.
In reality, its more about the MSFT's, GOOG's and ABT's of the world. Because the Benjamins don't (can't) appreciate, don't pay dividends and don't make the time value of money work for you. Though they are pretty.
The time value of money is king. Whether it be via compound interest, reinvestment, or other such things, a dollar today is worth more than a dollar tomorrow or next year and there's simply not much you can do about it. Capital is a resource, and like any resource, it has value. So depending on your risk preferences, the time value of your money is different than the time value of my money, but the volatility is also different...

So what to do? Perhaps you're young, just starting work, just making those first few dollars. Actually paying off Credit Card debt, and perhaps student loan debt should be a first priority. But maybe not. If your student loan debt is costing you 3% APY... and a good solid stock like MO or ABT is yielding a dividend yield above that (let us say... 6%), buying the stock is the better option. Does the stock have some volatility? Sure. But you're getting a good deal borrowing money at 3% (the fact that its already
borrowed is irrelevant... someone is letting you use their capital for only 3%!) and getting a 6% return. Bonus points.

A Roth IRA or a traditional IRA might also be excellent options. With a low starting cost (2500 is common), you can saddle up a retirement fund early. Maybe an index fund, or even a bond fund goes in there. Lucky for you, the gains you make in that account don't get taxed! So you're also realizing a minimum 15% savings over the other, free-floating methods of using that time-value of money effect.

Another little thought of idea is actually loaning your jobbed-and-trustworthy friends money if they have higher risk tolerance than you. Best example is simple:
You have an extra grand around. You could put it into a savings account (silliness) and earn .5%. Or a CD and earn 2%. Or you could loan it your buddy and earn, let us say, 4%. He can then put that same 1000 dollars into a dividend paying stock with a 6% yield. For the 2% difference (20 bucks on the year), he is purchasing the risk of the stock going down from you! But of course he also stands to gain if the stock goes up. So you've also forfeited some gain to him via this method. Nonetheless, you come out ahead of where you would have been because your buddy is paying you a better interest rate than a bank will give you (though he isn't FDIC insured... you do know where he lives and hopefully have a relationship that is worth more than a grand to him).

What about hard commodities, like Gold? Actually purchasing gold is an interesting idea, but perhaps try the GLD ETF instead. Buying actual gold has high transaction fees and unless you live in a fortress, you're probably going to want to store the gold in a safety deposit box, which is a yearly fee in many cases. Here's a great place to save some percentage points: If you have a safety deposit box already, and extra space in it, store some gold, silver, and foreign currency there. Yes, foreign currency, not to flee the country, but as a great vehicle for making a few points on the side. If the Euro appreciates against the dollar, you can always cash your Euros in for more dollars... and since the safety deposit box fee is spread across all the investments you store in there (and perhaps other valuables), you're not losing so much of your gain to the creep of fees. In the alternative, get a Forex account and trade the currency directly. The caution on 4X is that it is usually highly levered, something as high as 100 to 1. That's conducive to short term trades, but not conducive to a buy and hold strategy, which is often what currency requires (lots of noise but also some clear fundamental forces putting pressure on the instruments).

Alternative investments exist too: Real estate, collectibles, even bottles of wine. But such markets can be illiquid, have high maintenance costs, sometimes require specialized knowledge and rarely pay dividends. The exception to this is real estate when used for rental purposes. Inherited a house from a dead relative? Instead of dumping it on the market, think about renting it to a family. Be discerning, not just any craigslist post will do! But if you keep a fair market rate and take careful stock of your tenants, a rental can provide significant income. Plus, if the rental income stream is secured by a long-term contract, you can sometimes borrow against it and get capital today, perhaps for another investment opportunity paying a even better rate.

Ultimately its all about Pareto Optimality: Finding situations where you can arbitrage your risk preferences into capital without hurting anyone else in the process (and that someone includes banks oddly enough). Get that money working for you!