Investing Wisely

Whether you are saving for retirement, for college, or to buy a new home, it is essential to understand what method of investing is right for you. Are you saving to accomplish short-term or long-term goals? What is the risk involved? Not all investment vehicles will work for your personal financial goals. Understanding your goals and learning about your options will allow you to be more confident in your decision making.

Answer the following questions before you get started:

Define your goals. Define and understand your main objective. “Why are you investing money?”

How quickly can you get your money back? Stocks, bonds, and shares in mutual funds can usually be sold at any time, but there is no guarantee you will get back everything you put into it.

What is the return on monies invested? Some investments (such as bonds) promise a fixed return, while others (such as stocks) go up and down when the market changes. The type of vehicle you choose may critically affect your return on investment.

How much risk are you willing to take? How much are you willing to lose? Most securities are not insured by the federal government and there is always a possibility that you could lose the money that you invest. Determining how much risk you want to take will help to determine your return on investment. The higher the risk, the higher the potential return.

Are there any tax advantages? Depending on the type of investment that you choose, there can be tax exemptions or deferments. Specific goals, such as paying for college, or investing for retirement, may allow you to postpone or even eliminate the payment of income taxes.

Different types of Investment Vehicles

Bonds

Grouped under the general category called fixed-income securities, the term bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending your money to a company or to a government. In return, they agree to pay interest on your money and eventually pay you back the amount you originally lent them.

The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.

Stocks

When you purchase stocks, you become a partial owner of the business. This entitles you to vote at the shareholders' meetings and allows you to receive any profits that the company distributes to its owners. These profits are referred to as dividends.

While bonds provide a steady stream of income, stocks are unstable. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren't guaranteed anything. Many stocks don't even pay dividends, in which case, the only way that you can make money is if the stock increases in value - which might not happen.

Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.

Mutual Funds

A mutual fund is a collection of stocks and bonds funded by shareholders that trade in diversified holdings and are professionally managed by an investment manager.

The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than if you were to choose investments yourself.

Individual Retirement Accounts (IRAs)

An Individual Retirement Arrangement (IRA) is a form of retirement plan that provides tax advantages for retirement savings. Contributions may be tax-deductible; earnings are not taxed until distributed. The two most common IRA’s are Traditional and Roth. The characteristics of your goal will determine which retirement account is best for you.

Employer Investment Plans

Many employers encourage their employees to establish a 401(k), 403(b), or a 457(b). These plans allow employees to contribute a set amount of their annual income into the plan, tax deferred. In many cases, employers will match up to a certain percentage of the contributions into the plan, which is “free” money towards retirement.

Taking Action

When you have identified your goals and enhanced your investment knowledge, you are ready to begin. Some individuals hit the ground running and some utilize advice from a financial planner or advisor before getting started. What you decide will depend on the complexity of your goals and your overall comfort level with making investment decisions.

How to Protect Yourself

• Never invest in a product that you don’t understand.
• Be sure you have enough information before making an investment. Ask questions until you are satisfied.
• Understand the risks involved in your investment. Investments always entail some degree of risk.
• Know who is investing your money. Does the salesperson work for the bank or for a third-party broker/dealer?
• Select a representative who understands your financial objectives by interviewing two or three to compare experience, education, and professional background.
• Never send money to purchase an investment based simply on a telephone or email sales pitch.
• Never make a check out to your financial representative personally. Make sure that you make the check payable to the company that he/she is affiliated with or to yourself.

To find additional information related to investment vehicles, security, and protecting yourself from harmful transactions, please visit the following sites:

http://www.sec.gov/investor/pubs/inws.htm

http://www.usa.gov/topics/money/investing/tips.shtml

http://www.mymoney.gov/category/topic1/saving-and-investing.html

http://investor.gov/

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