Defining the differences between the two markets
The term “traditional markets” is thrown around a lot but when you get down to it this is mainly referring to the markets trading commodities, securities and foreign exchange (FOREX) and a variety of savings funds. Savings funds include but are not limited to ETF’s, CD’s, IRA’s, Mutual Funds, Money Markets, and of course 401Ks. There is certainly a lot to choose from and it can be quite daunting to learn what they all are, research them, figure out what the benefits and interest rates are, and then hire a broker who is going to get a cut of your investment. Confusing? I sure thought so when I first started, I touched on the differences between traditional & Roth IRA’s in my last article entitled “5 Money-Management Tips to Help Create Sustainable Wealth” and will go over briefly what all of these others are as well.
On the flip side there are digital-assets markets. This is still a new technology and is being developed for a lot of solutions in a lot of places. But, with so many startup companies, how can you know which ones will succeed? Simple answer, you don’t. And it’s commonly known that 80% of new businesses fail. Knowing this, and then realizing that digital assets aren’t regulated by the SEC … well, it leads to some skepticism. Think back to the dawning of the internet boom for example. A million new startup technology companies arrived on the market, some very cheap, some with very lucrative business plans and expensive IPOs. The same thing has been happening in the blockchain industry for a couple years now, with most new ICOs and startups beginning just prior to or in 2017 during one of the largest market bull-runs to date.
So, with all these new companies, business plans, and revolutionary technological breakthroughs on the horizon, it seems like a pretty good idea to invest right? This is where doing your own research comes into play. You have to use your own judgement on what to invest in, just like all of the traditional markets I explained above. Remember, Rome wasn’t built in a day, and neither was Amazon. Jeff Bezos worked on Amazon for years, and the stock price was so low he was on the verge of bankruptcy for nearly 20 years until Jeff Bezos’s vision finally fully transpired into a reality for him, and everything fell into place. Am I saying to do a years’ worth of research on all of the projects out there, drop $50K split between 5 or 10 of them and sit back and forget it for 20 years? Certainly not, that would assuredly be unwise and a foolish move. However, it is wise to do your own research before investing, make sure the startup has a history, a reliable and trustworthy team with proven experience and records of success, and invest using proper risk management skills, laddered entries to lower dollar cost average, and stop losses just in case something happens. Another important thing to remember with investing in the long term, is to frequently monitor them. Even if you are in it for the long haul and never plan on selling, it’s still a wise move to check on them every week and make sure everything is ok.
Explaining traditional investments and how they work
The Traditional & Roth IRA
I will go over just the difference between the two briefly as I have discussed this before. A traditional IRA will lower your taxable income due to contributions, which lowers your adjusted gross income allowing for tax incentives not previously available. Also, if you are under 59 and a half you can take out $10K for a first-time home purchase expense, medical, or other hardships without the penalties. Roth IRA contributions can be withdrawn any time (excluding the earnings) penalty & tax free to pay for first time home buying expenses as long as 5 years has passed since opening the account. The other advantage is you can grow these accounts more quickly by vesting them in index funds, individual stocks, and many other investments. Now when you ask, “ok well how much is the interest rate for returns?” the answer is different per provider and will vary, you have to pick what fits you best, depending on how much you can contribute etc.
Commodities
These are markets like Gold, Silver, Platinum, Oil, Crude, Natural Gas, Corn, Wheat, Cattle, Hogs, Cotton, Coffee, and Sugar. There are a few others but these are the highest traded. In the US, the Commodity Futures Trading Commission (CFTC) oversees commodity futures & options markets. Their objective is to promote not only competitive, but efficient and transparent markets to help protect consumers from fraud and manipulation.
Simply put an investor could purchase stock in a corporation that relies on commodities prices or purchase mutual funds, index funds, or ETF’s that focus in that market. A shorter-term way to strictly profit off of this kind of market would be to buy and sell futures contracts which require the holder to buy or sell a commodity at a predetermined price on a future date.
Securities
A security by definition is just a negotiable financial instrument that has monetary value. It usually represents an ownership of a publicly traded corporation via stock. Traded like most other goods in the modern day on a “hybrid” market platform that is digital such as e-trade, ScottTrade, TDAmeritrade, and a vast number of others. There are even 100% mobile platforms now. While these solutions offer a variety of different markets like the NYSE, S&P500, NASDAQ, and OTC, some will also include access to overseas markets like the London SEAQ or the Canadian TSX exchanges. It really depends what fits your needs and exactly what securities you are interested in.
Foreign Exchange
This is the exchange of one currency for another or conversion of one into another. The global foreign exchange market is by far the largest & highest liquidity market in the financial world. Daily volume usually reaches into the trillions. This market never closes on weekdays because of the time-zones and its globality. In this market there is no central body that oversees it, clearing houses, or central bodies either.
CD Accounts
Also known as a certificate of deposit, this type of account is pretty short and sweet to describe, especially for those interested in something federally insured. If you basically want to set it and forget it, with a fixed rate of interest, this is for you. Obviously, the downside to this is you are leaving your money in the account for a “term-length” and cannot access the funds without paying a hefty penalty. Term lengths vary in time but can be as long as 10 years. At the end of the day CDs are extremely low-risk, and you kind of get a reward. In my opinion there are many better alternatives and I feel this is an old-school, exhausted way to invest. Not to mention people are getting into digital assets so they have control of their funds in a transparent decentralized space.
Mutual Funds
Mutual funds are managed by a company, and is a pool of the publics money that is invested into other securities, stocks, bonds and other investment vehicles. You are technically buying the performance of the portfolio. These accounts give individual investors access to professionally managed portfolios and obviously, that’s the benefit. The other benefit is that these portfolios are diversified so if one of the investments managed by the fund company isn’t performing, they can allocate the funds into other investments that are. The main types of mutual funds to invest in depend on your personal preference and include the following; equity funds, fixed-income funds, index funds, and balanced funds. Keep in mind there are different fees associated with mutual funds because they are professionally managed, as well as deposit minimums, annual operating fees etc. Not being able to touch your money (which is not how a money market account works) is not very appealing for a lot of people.
Money Market Accounts
This is another FDIC insured account, and operates at a higher interest rate than a normal savings account like a CD. It will also require a higher balance like a CD account as well, however they invest in short term liquid securities. Usually these investments are certificates of deposit & government securities. Again, lots of talk in these last few options of “government” or “professionally managed”.
ETF’s
ETF stands for “Exchange-Traded Fund”. This means that this kind of investment vehicle tracks a stock index like the S&P 500, or a commodity. ETF’s are extremely similar to mutual funds however they differ because the shares of an ETF trade like that of a stock. That means that the price fluctuates throughout the day while the market is open and investors buy and sell. So basically, an ETF is a fund that owns assets such as crude, gold, stocks etc., and splits it up into shares. There are regulatory requirements for ETFs and be aware that some operate with what’s known as a “Unit Investment Trust” meaning that there is a predetermined date that the fund will expire. Since an ETF works like a stock, you obviously are entitled to a portion of the profits including dividends or interest. Even though ETFs maintain all the advantages of a stock (low tax, diversification, margin etc.), some are not as well diversified as others and may focus a lot of assets into one investment instrument. Due to the fact that these are also managed accounts, ETFs come at a higher rate.
401(k)s
Everyone has heard of these and surprisingly not many people ever educate themselves as to what they are or how they work. You portion an amount of your pay into this account for retirement. Some companies will match what you put in, and all companies offering them have different plans. Some of the plans are what’s known as “defined benefit plans”, which is a fancy way of saying a pension fund. You can only contribute a certain amount per year, normally around $20K (which isn’t a bad number at all), but there are distribution rules as well. Of course! More rules… If you retire, die, or acquire a disability that is the only way you can get the funds. Unless you terminate the plan that is. If you do terminate the plan you will not like the incredibly high amount of fees and taxes you’ll have to pay to get it. And when you do retire, you will still pay tax on it because it is considered “income” by the IRS.
Summarizing what all this all chocks up to be…
With many forms of investing someone else is either in control of your money, holding your money, and in most cases, charging you to do it. Does this seem fair? Not really right? If someone is providing you a service it’s implied, but the fees that seem almost made-up is practically theft. This is why most newer investors are going straight for foreign exchange trading, stock trading, and options/futures. There is more money to be made, and in general less fees involved. When you trade, you decide what happens with your money and you’re in charge of it all times. In highly liquid market like those established above, there is very little chance for manipulation, there is also regulations in place so people investing ridiculous sizes of money (i.e Warren Buffet) are required to disclose those trades so the market doesn’t seemingly crash or rocket up for “no-reason”.
Cryptocurrency and Digital Assets however are a totally different game. They are far less liquid meaning higher volatility. If you have traded stocks before this can be hard to adjust too, however if you’ve traded FOREX, this is nothing new for the most part. The corrections in the market from prior impulse moves would be exponentially greater and not as “predictable” in digital assets markets however. So, there is two sides to the “coin” as it were. Less liquidity, higher chance for profits, also higher chance for major losses. Lack of regulation has two sides as well, you can invest however much you want, when you want, pay little or no fees to do it, and probably be able to skip out on taxes (not recommended). However, this lack of regulation also means fraudulent companies, ICOs running rampant raising money on shiny new coins with no plans of producing a product, and then running an exit scam to steal everyone’s money. This also means unregulated exchanges.
Exchange regulation works both ways as well surprisingly, and I’m trying to make a point by presenting both sides in this last bit of the article. Exchanges (like Cryptopia, Mt.Gox) can be made by anyone that knows how to program a website, sure it’s not easy, but it’s not that hard either if you know what you’re doing. There are even ways to fake liquidity to make it seem like that brand-new exchange is the “next big thing”. Exchanges pop up everyday in the crypto world and it’s not a good thing to fall victim too. Some exchanges lack adequate security and can be hacked, like the ones mentioned above, or turn out to be a giant money laundering scam like 1Fox.
There are plenty of fantastic, honest, and transparent exchanges, developers, projects and so on. And in any new emerging technology you are bound to have thieves trying to make a quick buck. Like the traditional investments above, you must do your own research from reputable news providers like us and others, and invest in tried and true exchanges that are high in real liquidity.
Making the decision to invest traditionally or …not so traditionally, is a decision you have to make based on the quantity you want to invest, and the amount of security you want to have. How much risk are you willing to accept to make more money in your lifetime, and how long of a period of time are you willing to do it in? I hope this article not only educated you briefly on the wide array of investment options but also shed some light on why both have their own advantages and disadvantages. One thing is for sure either way though, no matter what, the internet and the introduction of Blockchain technology, isn’t going anywhere!
For more educational information like this or to learn more, please inquire about my private one-on-one sessions. You will learn what you want to learn on your own time.
