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Higher-Risk Investing

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When you are ready for higher-risk, long-term investing, consider stocks, bonds, real estate and mutual funds. They provide potentially higher rates of return, with a corresponding amount of risk. Many mutual funds combine investments in stocks, bonds and other securities, providing built-in diversification.

Stocks

Companies sell stock to raise capital. When you buy stock, you become a shareholder and own part of the company.
  • Your goal is to buy stock, hold it for a time, then sell it for more than you paid for it.


  • Stocks can receive capital gains treatment for federal income tax purposes, which may be beneficial.


  • A registered broker can help you buy and sell individual stocks. Choose a broker having a securities license, who works as a registered representative of a brokerage or mutual fund company.


  • Brokers charge a commission or sales fee for each transaction, reducing your returns.


  • Low-commission or discount brokers are less expensive, but you must be able to make your own purchase and sales decisions.


  • Stock can also be bought and sold through an established online investment account.

Bonds

Large organizations such as companies, the federal government and state and local governments need to borrow money occasionally. They often do so by selling bonds.
  • By purchasing a bond, you lend money to its issuer. In return, the issuer agrees to pay you a certain interest rate over a period of 1 to 30 years or longer.


  • The issuer also promises to repay your principal on the bond’s maturity date, the day the bond is due to be paid in full.


  • Corporate bonds are only as reliable as the company issuing them. Before you invest, consider what might happen to the company over the life of the bond.


  • Federal bonds are issued by the U.S. government — through the U.S. Treasury. Bonds are also issued or guaranteed through federal agencies or government sponsored enterprises. These bonds are called Agencies. They tend to be safer than other investments.


  • Municipal bonds are issued by state and local governments to help pay for schools, streets, airports and other public works. Risk and liquidity vary greatly among these bonds, so do your homework when considering them.

Real Estate

Real estate properties should be considered long-term investments. Consider the following.
  • Real estate may be used as a hedge against inflation. Real estate values generally rise with inflation, but this does not always occur.


  • You are liable for property taxes when you own real estate.


  • Federal income tax deductions may be available for property tax payments, as well as for interest charges and maintenance expenses.


  • Real estate investments can suffer loss if a geographic area experiences a local recession.

Mutual Funds

A mutual fund is an investment that pools the money of many investors for the purchase of stocks or bonds or other securities. Each fund — which typically may hold 50 to 200 or more stocks, bonds and/or cash investments — is professionally managed to achieve specific objectives at a chosen level of risk. Following is a list of mutual fund features and some of the advantages and disadvantages of investing in mutual funds.

Features Advantages Disadvantages
Diversification Investing in various industries and categories of stocks, bonds and money market funds can potentially reduce risk. You can over-diversify. High returns from a few investments may not make much difference in a portfolio's overall return.
Liquidity Generally, you may redeem (sell) your shares any day at their current net asset value. Upon selling shares, you may have a gain that is taxable for federal income tax purposes. (A loss of principal may be deductible for federal income tax purposes.)
Flexibility Fund “families” offer various mutual funds with differing financial objectives managed by one company. You can reallocate investments among those funds as your goals change. Moving money between funds may result in a taxable gain for federal income tax purposes. (A loss of principal may be deductible for federal income tax purposes.)
Convenience Most funds allow you to invest automatically with an allotment or automatic withdrawal from a bank account. Generally, you can buy or sell shares by phone, mail or online. Automatic investment plans do not ensure a profit or protect against losses in declining markets.
Professional Management Professional managers research and evaluate the investment potential of hundreds of companies. Individual investors usually cannot get this level of advice without a large portfolio. Investors cannot directly select the underlying fund investments and generally cannot control the amount of capital gains triggered by the fund. Mutual funds are not always tax efficient.
Regulation The industry is regulated by the Securities and Exchange Commission (SEC), with requirements designed to ensure investors receive accurate, timely and relevant information. Fund managers can be limited regarding type and number of investments.

Selecting A Mutual Fund

Carefully read each fund’s prospectus — a legally required description of the fund’s activities, objectives, holdings, managers, performance and fees. Make sure you understand the following.
  • Fund objectives. Determine which fund’s investment objectives (such as income, growth or balanced) match your long-term goals and risk tolerance.


  • Fund performance. Consider a fund’s performance (historic rate of return) over at least 3, 5 and 10 years. A consistent long-term performance may be a better choice than today’s front-runner.


  • Fund reputation. Research how long the fund has been in business and how it ranks against other fund companies. Many mutual fund companies have their own Web sites, and it is possible to invest through online brokerage companies. Do not invest based on information learned online without carefully verifying the source.


  • Fund expenses. Check the fund’s fees and expense ratio, which is the sum of the fund’s total annual operating expenses, expressed as a percentage of average net assets.

Mutual Fund Expenses

Types of mutual funds:
  • Load Mutual Funds carry a sales charge — a commission — that is paid to the investment firm that sells the fund. Only a portion of the investor’s principal contribution is invested.


  • No-Load Mutual Funds do not carry a sales charge and are normally sold directly from the investment company managing the fund. All of the investor’s principal contribution is invested.


Operating expenses reduce the fund's overall return. They are not taken from the principal investment, but are deducted from mutual fund assets before earnings are distributed to shareholders.

  • Management fees are paid to the fund’s advisor for managing the fund.
  • 12b-1 fees pay marketing and distribution expenses.
  • Other expenses pay to transfer agents, custodians, accountants, attorneys and others who provide services to the fund.

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