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When you are ready for higher-risk,
long-term investing, you should look at
four areas — stocks, bonds, mutual funds and real
estate — which may provide potentially higher
rates of return. Mutual funds can include stocks,
bonds and real estate and provide diversification.
The list in the chart below shows risks and
rewards tend to increase with certain types of
investments. Lower-risk and lower-return investments
are at the stable, bottom portion of the list.
Returns and risks increase as you move up the list.
Stocks,
Corporate Bonds,
Mutual Funds,
Real Estate
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U.S. Treasury Notes And Bonds,
Municipal Bonds
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Certificates of Deposit,
Bank Savings Accounts,
Money Market Funds,
U.S. Treasury Bills
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You should consider investments at the top
portion of the list only after you have built
a strong financial foundation. Remember,
there is no guarantee that higher-risk
investments will provide higher returns.
Investing In Stocks
Companies sell stock to raise capital.
When you buy shares of stock, you become a
shareholder and actually own part of the
company that issued the stock. Your goal
is to buy stock, hold it for a time and
then sell it for a price higher than you paid for it.
- Stocks generally offer potentially higher
returns with a corresponding amount of risk.
- A registered broker can help you buy and sell individual stocks.
- Brokers charge a commission, or sales charge,
on each transaction. This reduces your returns.
- Low-commission or discount brokers are less
expensive, but you need to be able to make your own purchase decisions.
- Make sure a broker has a securities license and
works as a registered representative of a
brokerage or mutual fund company.
- Stocks receive capital gains treatment on
federal income taxes, which may be beneficial.
Investing In 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.
- When you purchase a bond, you lend money to the bond’s issuer.
- In return, the issuer agrees to pay you a certain
rate of interest over a period of time, 1 to 30 years or more.
- 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 that issues them. Consider what might happen
to the company over the life of the bond
before you decide to invest.
- Federal government bonds are issued by the
U.S. Treasury and other federal agencies. Because
they are backed by the U.S. government, 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 exercise caution when considering them.
Investing In Real Estate
Real estate properties should be
considered long-term investments. Consider these facts.
- Real estate may be used as a hedge
against inflation. When inflation rises, real
estate values usually rise with it.
- While you own real estate, you are liable for property taxes.
- Federal income tax deductions may be available
for property tax payments, as well as for interest
charges and maintenance expenses.
- If a geographic area suffers a
local recession, real estate investments
can result in a loss.
Investing In Mutual Funds
A mutual fund pools the money of many
investors to invest in a variety of stocks,
bonds or other securities. Managed by professional
managers, an investment portfolio is designed to
achieve specific objectives. Portfolios typically
contain 50 to 200 different stocks, bonds and
other securities. The composition of each portfolio
varies according to the fund’s investment objectives
and the level of risk permitted. Following is
a list of mutual fund features and some of
the advantages and disadvantages of investing in mutual funds.
| Features |
Advantages |
Disadvantages |
| Diversification |
You can invest in a variety of
industries and categories of stocks, bonds and money market
funds reducing investment risk. With a broad investment base,
total returns are not as threatened by a few
unsatisfactory performers. |
It is possible to over-diversify
your investments. Because mutual funds have holdings
in many companies, high returns from several
investments may not make much difference
in your overall return. |
| Liquidity |
You can generally redeem or sell your
shares at any time at their current value. |
When you sell your shares you may have
a gain that is taxable for federal income tax
purposes or a loss of principal. |
| Flexibility |
“Families” of funds offer a variety
of mutual funds with different financial objectives
managed by one company. You can reallocate investments
among those funds as your goals and objectives change. |
Movement of your monies between
mutual funds may result in a taxable gain for federal
income tax purposes or a loss of principal. |
| Convenience |
Most funds allow you to invest automatically
with an allotment or automatic withdrawal from your
checking account (also known as dollar-cost averaging).
By making fixed, regular investments into a mutual fund,
regardless of share price, you may lessen your risk of
putting a large amount of money in a single investment
at the wrong time. Generally, you can buy or sell
shares by phone, mail or online. |
Such automatic allotment or withdrawal
plans do not assure a profit and do not protect
against losses in declining markets. |
| Professional Management |
Mutual funds are managed by professionals
who research and evaluate the investment potential of
hundreds of different companies. Individual investors
usually cannot get the same level of investment advice
without a large portfolio. |
The investor 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), imposing requirements designed
to protect investors from abuse. |
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Mutual Fund Expenses
Two types of mutual funds are:
- Load mutual funds carry a sales charge
that is paid to the investment firm that sells
the fund. The impact for the investor is that
only a portion of the principal contribution
is invested in the fund.
- No-load mutual funds do not carry a
sales charge and are normally sold
directly from the investment company that
manages the fund. All of the investor’s
principal contribution is invested in the fund.
Operating expenses are not taken from
the principal investment but are deducted
from mutual fund assets before earnings are
distributed to shareholders. In other words,
they will reduce the overall return of the fund.
- Management fees: Fees for fund operation
(salaries, office space, computers, etc.).
- Custodial fees: Fees to provide clerical services to the mutual fund.
- 12b-1 fees: Fees to pay marketing and advertising expenses.
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Basic Money Management
Basic Money Management
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