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Investment Tip for 2016: Be Boring!

One of the hardest questions I'm asked is some variation of "I have an extra $10,000 to invest and want to know the best place to invest it." The investment part is relatively straightforward. The hard part is making the boring answer I provide seem appealing.

Various external sources prod us to expect out-sized investment results, whether it's financial industry advertising or stories from friends of high returns with minimal risk. (It doesn't exist.) Thus it's not unusual for people to seek the investment equivalent of a home run. Advisors are not always popular when they recommend playing "small ball" instead.

Carl Richards, an advisor/author, describes a small ball strategy as one that "doesn't focus on rare, showy and hard-to-predict events, but on making small, relatively easy-to-repeat moves that compound into positive results over time."

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How Much do you Save in a Half-Off Sale?

I recently asked how much someone saved if they bought a shirt for $50 that was originally priced at $100. Sounds like a simple question, but you need to dig a little deeper to determine the answer.

The scenario involved Sam and Sadie shopping at Nordstrom. Sam saw a shirt he really liked. At $100, the thrifty Sam had no intention of buying it. Luckily Sadie noticed that the shirt was on sale for $50. This was a price Sam was willing to pay.

Only 19% of the respondents said that Sam saved 50% in the deal. Nearly half (47%) said that Sam saved nothing, while a third (34%) said "it depends."

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One Quick Way to Know if an Investment is Risky

Many investment opportunities come with a compelling story and an enticing promised return. These investments can be quite complex. While there is no substitute for due diligence, listen to find out how you can apply a quick test to assess the risk of a venture.

Musical Treat

Not every enticing investment story is a bargain. In the song "Bargain," The Who sing "I'd pay any price just to get you." Check out this great live version with an aging band that still rocks. A fantastic song, but not good investment advice.

Explaining Interest Rates with Hamburgers

Popeye the Sailor Man has a sidekick named Wimpy, with a prodigious appetite, who famously says "I'll gladly pay you Tuesday for a hamburger today." Wimpy provides a classic example of consuming now and paying later. The Federal Reserve, by continuing to keep interest rates low, is promoting such behavior.

Think of low interest rates as making money cheap. With cheap money, there is an incentive to borrow and consume now and repay the debt in the future.

In fact, that is what the Federal Reserve has sought to accomplish. In response to the recession that began in 2008, the Fed moved to dramatically reduce interest rates in an effort to spur spending and revive the economy.

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Putting a Stock Market Decline in Perspective

If the stock market didn't go down on occasion, sometimes dramatically, then you would not experience the positive long-term results that have historically occurred. How is this possible?

Stock returns in the long run have been quite compelling because of many factors, such as a growing profits. But another factor is something known as the "risk premium."

Think of it this way. A 10 year U.S. Treasury bond is paying around 2% a year. This is not much of a return, especially after inflation and taxes. The trade-off is knowing that you will likely receive the stated interest payments and get your money back at maturity. You just don't get paid much for certainty.

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