Vehicle
Bar
Family
House
Bar
Insurance
 


Higher-Risk Investment Alternatives

Previous Next:  Investing For Retirement

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
U.S. Treasury Notes And Bonds,
Municipal Bonds
Certificates of Deposit,
Bank Savings Accounts,
Money Market Funds,
U.S. Treasury Bills

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.  

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.

Previous Next:  Investing For Retirement