different types of investments and the advantages and disadvantages of each: bonds, certificates of deposit, money market mutual funds, and stocks. Bonds: higher interest, more risk (... as in, you may not get paid)
CDs: lower interest, less risk, and if the bank goes under, your money might be insured... bad news is that your money is locked up for the life of the CD, penalty if you need it early
Money Market funds: hmmm.... CDs might pay a little more interest
Stocks: no interest, you can lose Everything, if you're lucky enough to make it big in stocks, then you probably have plenty of money already and don't need to take the chance. If your luck isn't so hot.. then you'll have more fun losing your money in Vegas
Mutual Funds: these are based on stocks, so yep, you can lose a lot of money. A mutual fund is generally better than a Stock because the funds own a lot of different companies, so if one company goes bad, it won't hurt so much.
Stocks & Mutual funds allow you to lose some or all of your money, on the chance that you might make some... The other choices are better if you'd be sad seeing your hard earned money evaporate! CDs. - Very safe, lower rate of return than most other investments, earnings may not outpace inflation.
Money market mutual funds - Pretty pointless. You can find the highest money market rates yourself and save yourself the management fees. Money market rates are pretty close to CD rates, but the rate can change as often as daily, it is not locked in (which can be good if rates rise and bad if they drop), but again, the return over time may not keep up with inflation. Investors nearing retirement generally use money market/CDs for the lion's share of their portfolio, for safety.
Bonds - Provide income, sometimes tax-free (municipal government bonds), but you can lose money on the principal if you have to sell at the wrong time. Bond mutual funds are better for the average investor; individual bonds are for the sophisticated investor. Bond funds, over time, provide a higher rate of return than CDs/money market.
Stock mutual funds - The safest way to invest in company stock, because while there is always the risk of loss, risk is minimized by spreading out your money over many companies instead of putting all of your nest egg into one company's basket. Over time, even factoring in down years in the market, good growth mutual funds have far exceeded the rate of inflation. Investing in mutual funds, a little every month over many years, has built far more personal wealth than all of the 'made a big score' investors in some individual winner like Microsoft or Google combined.
Individual stocks - glamorous, unlike 'boring' funds, but far, far riskier. Not for the average investor. Smart financial gurus like Suze Orman tell you that individual stocks are fine if you have a million dollars squirrelled away, otherwise, stick with good mutual funds. Of course, the Jim Kramers of the world will tell you different, but for every successful 'average' trader of individual stocks, there's numerous failures. Your easiest method of securing a good return is to invest in what are called index funds.
In a nutshell, index funds are the top stocks at any given time; it is handled for you.
It is very rare that a human managing mutual funds can measure up to the performance of index funds. But nobody wants you to know this because those who deal in mutual funds for you would be out of a job in a heartbeat. CD's are guaranteed short term investments and offer mid range interest. Use them if you'll need the money in a year or two.
Bonds are slightly higher interest and offer more dividends. Typically, you'll buy more bonds as you get older because their considered safer investments than stocks.
I'm guessing your young so you should think of buying bonds, but most of your investments should be stocks and retirement accounts. Stocks give the highest sustained interest, but have been given a bad name because people in the tech bubble invested in companies that never made a profit. Look into high growth stocks that are market leaders in their industry. When buying stocks you should think about spending a minimum of $1,000 on each purchase.
Mutual funds are a good starting point for investing. They'll combine bonds, mid-growth and high-growth stocks in the right proportion to maximize your interest while providing protection against losses. The downside is that you pay for the manager to manage the funds for you. In earnest thats usually a good idea. Fidelity and Vanguard funds are generally accepted as good values.
Whatever you do one of the biggest mistakes people make are thinking of the investment as a short term buy. Buy the investment and keep until you know its going to loose 25% of its value. If it does loose 10% of its value and its a good company don't sell.... Buy more and it will rise again in a year or less. Growth stock mutual funds with at least a 10 year track record. |
