What are the best saving and investing products for you? The answer depends on when you will need the money, your goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.
For instance, if you are saving for retirement, and you have 35 years before you retire, you may want to consider riskier investment products, knowing that if you stick to only the "savings" products or to less risky investment products, your money will grow too slowly—or given inflation or taxes, you may lose the purchasing power of your money. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.
On
the other hand, if you are saving for a short-term goal, five years or
less, you don't want to choose risky investments, because when it's
time to sell, you may have to take a loss. Since investments often move
up and down in value rapidly, you want to make sure that you can wait
and sell at the best possible time.
|
|
Because it is sometimes hard for investors to become experts on various businesses—for example, what are the best steel, automobile, or telephone companies—investors often depend on professionals who are trained to investigate companies and recommend companies that are likely to succeed.
Since it takes work to pick the stocks or bonds of the companies that have the best chance to do well in the future, many investors choose to invest in mutual funds.
A mutual fund is a pool of money run by a professional or group of professionals called the “investment adviser.” In a managed mutual fund, after investigating the prospects of many companies, the fund’s investment adviser will pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall.
Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
Even small fees can and do add up and eat into a significant chunk of the returns a mutual fund is likely to produce, so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares. If two funds are similar in every way except that one charges a higher fee than the other, you’ll make more money by choosing the fund with the lower annual costs.Many investors choose to invest in index funds. An Index Fund is a mutual fund that does not attempt to pick and choose stocks of individual companies based upon the research of the mutual fund managers or to try to time the market’s movements. An index fund seeks to equal the returns of a major stock index, such as the Standard & Poor 500, the Wilshire 5000, or the Russell 3000. Through computer programmed buying and selling, an index fund tracks the holdings of a chosen index, and so shows the same returns as an index minus, of course, the annual fees involved in running the fund. The fees for index mutual funds are generally lower than the fees for managed mutual funds.
Historical data shows
that index funds have, primarily because of their lower fees, enjoyed
higher returns than the average managed mutual fund. But, like any
investment, index funds involve risk.
Many companies offer investors the opportunity to buy either stocks or bonds. The following example shows you how stocks and bonds differ.
Let’s say you believe that a company that makes solar panels may be a good investment. Energy conscious consumers everywhere are buying these solar panels, and your friends report that the company’s solar panels rarely break and can operate well for years. You either have an investment professional investigate the company and read as much as possible about it, or you can do the research yourself.
After your research, you’re convinced it’s a solid company that will sell millions of their panels in the coming years. This Solar Energy company offers both stocks and bonds. With the bonds, the company agrees to pay you back your initial investment in ten years, plus pay you interest twice a year at the rate of 6% a year.
If you buy the stock, you take on the risk of potentially losing a portion or all of your initial investment if the company does poorly or the stock market drops in value. But you also may see the stock increase in value beyond what you could earn from the bonds. If you buy the stock, you become an “owner” of the company.
You wrestle with the decision. If you buy the bonds, you will get your money back plus the 6 % interest a year. And you think the company will be able to honor its promise to you on the bonds because it has been in business for many years and doesn’t look like it could go bankrupt. The company has a long history in the energy business and has a solid reputation. Your research shows that its stock has gone up in price by an average of 6% a year, plus it has typically paid stockholders a dividend of 3% from its profits each year.
You take your time and make a careful decision. Only time will tell if you made the right choice. You’ll keep a close eye on the company and keep the stock as long as the company keeps making money. Buying and selling stocks is a potentially risky investing practice. Be careful. Only invest as much as you can reasonably stand to lose.
If Building wealth is one of your goals - start saving money and invest as much as you
can feel comfortable with. Be careful and do your research. If a deal
sounds too good to be true - it most likely is. You can start
saving and investing and building wealth at any stage in
life!
