Where Should You Invest
by Justin Vencel
Saturday, September 4th, 2010
Let's assume you've decided to take the plunge into investing for the first time, where should you start? What kind of investments are out there and which ones are right for you? To be clear there or more places to put your money than ever before so deciding what to put in your portfolio can seem daunting at first.first
Investment Portfolio - Your collection of all the different investment types.
Remember, the goal is to build wealth for the long run and to save for retirement or any other financial goal you may have. Unfortunatly there isn't one single magic ticket that will get you to where you want to go, you will have to take advantage of several different financial vehicles along the way. Let's take a look at a few of the more common choices.
Short Term Savings
- Savings accounts
- Money Market Funds
- Certificates of Deposit (CD's)
More the most part these options offer lower overall returns in exchange for greater security. These are good places to park money that you cannot risk to lose or that you may need easy access to (like an emergency fund or a down payment on a house).
Savings accounts are familiar to many people and tend to be one of the first experiences many people have in investing. These accounts provide a safe and secure location to park your cash while earning a modest amount of interest.
Money market funds are actually a type of low-risk mutual fund that aims to be extremely stable and keep their price at a constant $1 per share. These funds will typically earn you more than the average savings account but not as much as a certificate of deposit. Many money market funds now also allow you to write checks against them making them attractive alternatives to the savings account.
Certificates of Deposit or CD's typically provide you with the highest return of the three short-term savings types. This is a time deposit meaning that you money will be unavailable for use by you for a pre-determined amount of time (often three, six and twelve months). You will receive periodic interest payments on this money until the CD matures, at which time the money may be withdrawn together with the accrued interest.
Long Term Savings
- Bonds
- Stocks
- Mutual Funds
- Index Funds
This will be the heart of your long-term portfolio and generally contains higher-risk investments in exchange for a larger return. These following investments can usually be made by opening a brokerage account.
Bonds typically provide the buyer a semi-annual fixed amount of income, the coupon, until its maturity date. These work similar the the certificates of deposit that we mentioned earlier only these are issued by governments and corporations instead of banks.
Stocks provide partial ownership in a business, and through the rise and fall of the stocks price, any profits from that business. Stocks have historically provided the greatest return on investment of any of the options listed in this article.
Mutual funds are a collection of many different stocks under the direction of a fund manager. This vehicle allows investors to collectively pool their money together in order to buy large amounts of securities. When you buy a mutual fund, you are allowing the fund manager to decide what stocks and bonds to buy instead of doing the selection yourself.
Index funds are also collective investments but they aim to mimic the movements of a specific financial market and not a fund manager. One common index is the S&P 500, a value weighted index of the 500 largest companies traded in the United States. One advantage is that a lack of active management usually results in much lower fees for index funds compared to mutual funds.
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