Dollars & Sense
Smart Investments - Part I
Since we get many inquiries as to what to do with money set aside for retirement investments, this will be the first of a two part series on investing.
While we are not investment counselors and we are not encouraging any particular type of investment, we would like to explain alternatives to leaving your money in the bank, which at today's interest rate (about 1%), is not helping very much in building your nest egg.
Most investment counselors adhere to the theory of diversification, diversification, diversification. Some people think that by buying a mutual fund that invests in multiple stocks is diversification.
However, if the stock market goes down, the odds are those stocks which the mutual fund has invested in will also go down. If you put all your investment dollars into mutual funds, you are not really diversified if those funds are all invested in stocks.
A nice mix of investments would include real estate, cash, mutual funds, bonds, hedge funds, index funds (or I-shares) and stocks; let's see if we can define the different types of investments. Remember, the greater the potential return on an investment (profit), the greater the risk.
CASH
1. Savings accounts
A savings account is the most secure investment. Therefore, the return you get by keeping the cash in a savings account is the smallest of all investments. Right now that return is about 1%. These accounts are insured up to $100,000.
2.Certificates of Deposit
Certificates of Deposit, also known as CD's, is an investment of cash that pays a slightly higher interest rate than a savings accounts because you are committing your cash for a certain amount of time such as 6 months, 1 year, 2 years, 3 years, 4 years, 5 years.
The longer the term of the obligation, the higher the interest rate. However, if interest rates spike in the interim, then you will be getting a small interest rate compared to the current market. If you cash in your Certificate of Deposit early, there are penalties to pay. These are also insured up to $100,000.
Money Market Accounts - These are cash savings accounts not insured, but very secure and pay slightly higher interest than savings accounts.
STOCKS
Buying shares of corporate American companies can be quite rewarding and quite risky. If you are interested in buying stocks, then my advice would be to get the advice of a professional portfolio manager.
When you buy a share of stock in a company such as Microsoft, you are buying an ownership in that company. The better the company does, the better the stock usually does. The reason a company sells stock in the first place is to raise capital so that the company can grow.
Once the stock is in the market place, people buy and sell it everyday. However, even though people buy and sell a company stock everyday, the company may not have issued any stock in the last 10, 20, 30 years.
To make it easier to buy and sell a company stock, the stock markets were created, which today are known as stock exchanges. There are currently 3 major exchanges: The New York Stock Exchange, the American Stock Exchange and the Nasdaq.
If you want to buy a stock, you need to call a stockbroker or hire a professional portfolio manager who places the trades for you within the stock exchanges.
Some stocks you buy pay dividends anywhere from 1 and up to 5, 6, 7, or 8% and more. Not only can you make money buying a particular stock, you can also make money by buying stocks that pay a good dividend which, by the way, under current tax law are 85 percent tax free.
MUTUAL FUNDS
Mutual funds have become a very popular way of taking some of the risk out of investing in individual stocks by investors. Mutual funds are a collection of stocks selected by the mutual fund managers and sold to investors as shares in a fund.
There are several types of funds you can invest in. Some of the more popular types are technology funds, growth funds, security funds, and income funds. However, mutual funds can be costly because they have hidden expenses for running and marketing the fund.
INDEX FUNDS
Index funds can be an alternative to mutual funds as they invest in the number of stocks that make up a particular indexes such the S&P 500 Index.
Since index funds are easy to manage because they accumulate the stocks of a particular index, the costs are much less than a mutual fund. Index funds are traded on the stock exchanges as I-shares. There are a multitude of index funds or I-shares to choose from.
This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping service to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director Business Development for PBS. If you would like further information, please contact us at 800-697-5153. Visit our Web Site at www.pbstax.com.
"Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.