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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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Basic Money Management
Basic Money Management
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