Growing Your Investments
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There's almost nothing as exciting as making plans for your future. Who doesn't like thinking about their dream home, that special vacation, or being able to provide your kids with all the opportunities they need to be successful on their own? Not to mention what may be the most exciting plans of all - having enough money saved up to really enjoy yourself in retirement.
Meeting your savings and investment objectives requires hard work, good judgment and lots of discipline. This Web site will only scratch the surface of the many savings and investment options available to you, so you're encouraged to visit the other sites we recommend. But to get you started, here we describe some of the core products in the asset accumulation part of the financial planning pyramid:
Stocks - Stocks are defined as shares in the ownership of a company. Today, over half the population is invested in the stock market in one way or another. Over the long-term, it's one of the surest ways to build wealth. However, investing in equities, as stocks are also known, does carry some significant risk as we've learned over the past few years.
To minimize your risk, it often makes sense to diversify your investments across a variety of sectors (i.e., don't put all of your money in tech stocks). It can also be a good idea to seek the advice of stockbrokers or other investment advisors whose full-time job is to advise clients on where to invest their money.
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Bonds - Bonds are debt investments that can be used in your portfolio to balance the financial risks inherent in investing in equities.
A bond is a loan to an entity (a government or corporation) that needs funds for a defined period of time at a specified interest rate. In exchange, the entity will issue you a certificate that states the interest rate you are to be paid and when your loaned funds are to be returned (maturity date). Interest on bonds is usually paid every six months.
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Mutual Funds - Mutual funds are collections of stocks or bonds which, by definition, create instant diversification in your portfolio.
There are two main types of mutual funds. Index funds seek to mimic "the market" by buying representative amounts of each stock in a particular index (e.g., the S&P 500). "Actively managed" funds rely on investment professionals to make the investment decisions. Because fund managers cost money, the expense fees for index funds tend to be much lower.
As with stocks, you can certainly do your homework and save on commissions and fees by picking your own mutual funds. But with over 8,000 mutual funds from which to choose, you may want to seek the advice of an investment professional.
401K Plans - 401K plans are voluntary retirement plans offered to employees of a growing number of companies. These plans allow employees to set aside and invest a certain percentage of their pretax income. The funds and their growth are not taxed until the funds are withdrawn. Many employers also match their employees' investments up to a certain percentage.
With most 401K plans, employees have a variety of investment options from which to choose. If you're years from retirement, you should probably invest almost entirely in stock funds. If retirement is approaching, it's time to reduce risk by shifting some money to bond funds, cash or some other type of fixed-income investment. Keep in mind that the penalties are pretty stiff for withdrawing funds early from your 401K plan.
Also, you should know that 401K plans, though increasingly popular, are not offered by all employers and are just one form of retirement plan. There are Defined Benefit Plans, Individual Retirement Accounts, Simplified Employee Pensions, 403B plans, and Keogh plans, just to name a few. For a comprehensive list of the many types of retirement plans and good descriptions of each, click here:
For more information about investing basics, here are some Web sites we recommend: