New Year for New Investors

invesmentWhether you’re looking to grow your income to finance your hobbies, expand your business, or contribute to a nest egg, making your investments work for you is surprisingly simple.  Jumping into the investment market as a teen or a retiree makes no difference, there are both quick and slow ways to build up your investments.  Pick an investment type that works for you.

 

Types of Investments

 

Each type of investment carries its own set of risks (the probability of liability or loss) and potential gains (quick turn profit or growth over time).  Generally, the more risk involved, the higher potential there is for larger gains or loss.  Buying stocks and shares, for example, offer short-term gains but are a quick way to turn a profit.  Listed below are a few types of investments that people of all ages typically deal with:

 

Stocks and Shares:  With stocks and shares, the investor buys a percentage of ownership of a public business, therefore making them a part-owner of the business.  Stocks can be highly profitable—the more successful a company or a stock is, the more money you stand to make.  Stocks are high-risk, though, because the market is unpredictable, and the shareholder risks losing some of all of their investments.

 

Bonds:  Bonds yield little risk, and therefore do not have a high potential for returns.  Bonds are like IOUs that you lend out to companies, councils or the government.  Interest is paid back to the lender on the amount loaned.

 

Property: Buying, restoring, and renting or selling real estate can potentially net large sums.  Like stocks, however, the market is unpredictable.  It would be best to look at trends in your local area if you’re looking to invest in property.

 

Certificates of Deposit (CD):  CDs are fixed-period investments with banks or savings and loan companies.  Like bonds, CDs rely on interest and carry a low risk.

 

Commodities:  Commodities include gold, silver, jewelry and precious metals.  Like stocks, commodities are high risk because their value waxes and wanes in the unpredictable open market.

 

Mutual Funds:  Mutual funds are a collection of assorted investments that may include stocks, bonds, properties and cash-equivalents, the purpose of which is to create a balanced portfolio.  Mutual funds contain both low-risk and high-risk investments, so sometimes investors consult outside agents to strategize their portfolio to try and achieve the highest potential for profit.

 

This is only a partial list of investment types.  Other types include but are not limited to: futures, cars, artwork, stamps, hedge funds and foreign exchange currencies.

 

Planning Appropriately Based on Your Age

 

If you’re a middle aged business owner that is looking to stretch out your earnings for a retirement plan, but do not have any experience with investing, where do you start?  Your investment trends should change over time.  The younger investor can afford high risk investments, while the older investor should play it safe and be conservative with their options to maximize their savings.

 

The Young Upstart 

Young investors have the opportunity to learn the market from the ground up, so having a large portfolio is crucial to earning big.  Mutual funds provide a hassle free approach to investments with a high-yield potential.  They get you familiar with multiple investments.  Young investors should carry a higher percentage of stocks than bonds in their portfolios.  A good stocks/bonds percentage should look like 70/30 or 80/20.

 

Mid-Life Planning

Middle-aged portfolio builders should begin to stay away from riskier investments.  Back off the stocks and mutual funds, and switch to safer, more predictable assets like CDs and bonds.  A middle aged portfolio should contain a stocks/bonds percentage close to a 50/50 split with a higher percentage of stocks at about 55 percent, and gradually reduce stocks down to 20 percent near retirement.

 

Finely Aged Entrepreneurs

If you are late in the game, don’t worry, there’s a plan for you.  To reduce stress, older investors can always hire a financial advisor that can help you work toward your goals and base a plan on your interests.  Beware of investment fraud.  Older people are often a common target for financial crime and scam artists.  Do not fall for high-pressure sales tactics, intimidation, limited offers, seminars, or “elderly specialists” with bogus certificates and accommodations.  As a rule, it’s best to stick with low-risk investments like bonds, CDs, smart real-estate, gold, fixed income cash investments and long-term care insurance.  A starting portfolio for older investors should be around 35 percent or lower in stocks and 65 percent or higher in bonds. Older investors should look into IRAs, which provide instant tax benefits with annual contributions.

 

No matter your age, it is important to find an investment plan that works for you—there’s money to be made.


		
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Mutual Funds 101

Mutual Funds Mutual funds carry a unique set of risks and benefits in just the same way as other investments, despite marketing that may have led you to believe otherwise. A mutual fund is an investment in securities, including bonds, stocks and other vehicles, that is funded by a pooling of money from various investors. Before you decide to invest in a mutual fund, you need to know what you`re getting and what all your options are.

 

Stock, Bond and Money Market

 

Mutual funds usually come in three distinct types. Each type has inherent drawbacks and benefits, so weigh your financial goals and risk tolerance before making a final decision.

 

The stock mutual fund has the potential to pull a high return but poses more risk than the other available types. With stock funds, you must consider the purpose behind the stock selection. For example, some firms bundle together stocks in a particular industry, such as medical. Others use more general selection criteria to meet a goal, such as rapid growth.

 

Since stocks are known to fluctuate and are fully exposed to the volatility of the market, you can lose a significant portion of your investment if the fund stocks tank or the market itself dives. Get familiar with the fund manager`s aim behind the stock selection and evaluate current stock rates and histories for those securities included in the funds.

 

A bond fund is often less risky than a stock fund but carries more risk and a higher gain potential than a money market vehicle. Bond funds vary dramatically in type, from `junk bonds` issued by weakened or new companies to municipal bonds from local governments.

 

Junk bonds naturally carry a lot of risk but have a higher gain potential. A new company may take off unexpectedly, earning you a big return on your investment. On the other hand, if the business fails, your fund`s value will drop. Municipal bonds from a stable city will cost more but carry less risk than a bond from a city that is struggling. Since the risks and benefits vary greatly by bond type, you`ll need to consider all the angles before investing in a bond fund.

 

A money market mutual fund, not to be confused with a money market bank account, is normally the mutual fund type that carries the lowest risk and gain potentials. Federal regulations restrict money market funds to safe bets, such as short-term investments in high quality vehicles. While you won`t have the opportunity to gain as much as you could under a stock or bond fund, money market funds may be a good option for you if you`re testing the waters or have a low loss tolerance.

 

Know the Fees

 

Your mutual fund choice is subject to fees charged by the managing entity. Know what all the fees are associated with the funds you`re considering so you can compare rates across different providers.

 

You may have to pay a percentage fee upfront or when you sell. Some funds charge a management fee instead of an upfront or back end percentage. Other costs are deducted from the total investment pool itself, as found under the managing entity`s fee table in the prospectus. While you won`t pay an individual bill for those other costs, excessive fee taking from the entire pool can hurt the fund`s performance.

 

Selecting a managing entity can be almost as difficult as deciding the fund type. Price alone shouldn`t be the deciding factor, as you need a fund that is managed well to protect your investment and earn a return. Look at feedback from Finance Community about the fund managers you`re considering and review past performance before making a decision.