Types of Investment Options & Investment Accounts

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types of investments
If you watch tv, read financial magazines, or just casually surf the Internet, you’re bound to be bombarded by a plethora of investment options.  It’s no wonder that many people get confused. But in reality, the average person only needs to know about the basic types of investments discussed below to get their portfolio going. Just because a television or magazine ad makes an investment sound tempting, it doesn’t mean it’s a proven winner or a good fit for your specific financial situation.

Green Wealth Belt (GWB)
Jumpstart Training Mini-Course

  1. Green Wealth Belt: Introduction
  2. Types of Investment Options & Investment Accounts
  3. Determine Your Investment Risk Tolerance Level
  4. Designing Your Investment Portfolio
  5. How to Accelerate Wealth Creation & Conclusion

 

Types of Investment Options

Mutual Funds –  These are collections or baskets of investments (stocks, bonds, money market) created by mutual fund companies. For example, a company could decide to create a mutual fund comprised of stocks associated with the oil industry. In that basket, you would find stocks for companies engaged in oil drilling, shipping, refining, equipment manufacturing and more.  As an investor, you would be allowed to invest in that basket.

Or, the basket could contain the stocks of all the leading companies in America, regardless of their industry. There are literally thousands of mutual funds in the investments marketplace. Whatever combination of stocks you can think of, there’s probably a mutual fund that covers it.

Mutual funds have a reputation as being less risky than owning individual stocks. However, there are mutual funds that are purposely designed to carry higher risks (and higher reward/loss potential) than others.  You can often open a mutual fund account with as little as $25. Mutual funds will likely comprise the largest chunk of your investment portfolio.

(Note: Mutual funds are generally classified as load or no-load. No-load means that you won’t be charged a commission or fee each time you buy shares of the fund.  Load means you will pay commissions or fees every time you buy or sell shares, and for other things. Try to stick with no-load mutual funds unless the load fund has an amazing long-term performance track record that justifies the fees.)

Stocks – If you want to own part of a company or become a shareholder, you would do it buying their public stock which is listed on the New York Stock Exchange, NASDQ, or elsewhere.  All you’d have to do is open an account with an online brokerage firm, deposit money into it, and you’re on your way. Having stocks as part of your overall portfolio is perfectly fine as long as they do not represent a major percentage.

In theory, you could create your own little mutual fund by buying a variety of stocks, but you have to be prepared to manage and monitor their performance on an ongoing basis.  And be aware that stocks are riskier investments than other options.

Bonds – In general, bonds are issued by companies and public authorities such as cities and states. In essence, this is borrowed money that will be used to pay for special projects such as replacing sewer systems, renovating inner cities, constructing new manufacturing facilities, etc. When you buy a bond, you are loaning money to the company or public institution for an agreed upon number of years. In return, they agree to pay you interest on the loan.

The terms can be such that you’re only paid some of the interest portion every six or twelve months. Then, in five years, they’ll give back the original principal amount you loaned them.  When you buy bonds, there’s a “quality” rating associated with them so that you’ll know the level of risk.

The advantage of bonds is that they can provide a steady predictable income stream through the interest payments. This can be an especially good, low-risk investment for someone who is retired or about to retire.

Certificates of Deposit (CD)  – This is a certificate or promissory note that you can get from your bank when you deposit a lump sum of money such as $500, $1000, $2500, or more. The certificate carries a guaranteed interest rate you’ll be paid. In return, you agree not to ask for your money until the CD matures in 1, 5, or whatever number of years you agree to.

Of course, you can get the money, if needed, before the maturity date, but you’ll likely have to pay a penalty. The benefits of CD’s are that they are very safe and government insured. The downside is that the interest you earn will be tiny.

Treasury Bills – These (T-Bills) are issued by the U.S. Government to help pay its debt obligations. You would buy these in denominations of $1000 or more and they will mature in a year or less.  To keep it very simple, the way it works is that you would buy a $1000 T-Bill at a discount.

So you would fork over $950 and be handed a T-Bill with a face value of $1000. You would be told that you can redeem the T-Bill in one year and collect the full $1000. That’s a $50 profit for you.  T-Bills are very safe since they are backed by the full faith of the U.S. Government.

In conclusion, you now know the investment world that you should navigate in for the time being. These areas account for about 80% of my retirement portfolio.  So don’t let some slick financial salesperson talk you into some crazy investment scheme where you don’t fully understand the complexities and risk.

Basic Long Term Investment Accounts

In an effort to encourage us all to take the bull by horns and contribute more money toward our retirement years, the government has tried to be creative. So they’ve come up with a variety of retirement plans and accounts. In and of themselves, these long term retirement accounts are NOT investments.

They are more like retirement investment buckets. So, just as a bank account holds your cash, a retirement account holds your various investments.

What makes them unique is that they have special rules relating to taxes, contributions, distributions, and withdrawals. At the end of each year, the financial institution that manages or maintains your retirement account will provide the IRS with a summary of the activity. As a Green Wealth Belt holder, here are two of the most important retirement plans and accounts that you should participate in if you currently don’t.

Company Sponsored Retirement Plans – These go by such names as 401(k), 403(b), etc. You are permitted to contribute a percentage of your salary into a personal account. As an employee incentive, many companies will match your contribution up to a limit. That translates into free money. The contributions are generally made with before-tax dollars, which means that you won’t pay any income taxes on that money until you withdraw it much later in life (hopefully).

The actual investment vehicles inside these plans are primarily mutual funds.  So you can spread the money around to suit your risk profile. All in all, the tax benefits and company matching make contributing to your company’s savings plan a no-brainer. At a minimum you should contribute enough each year to take full advantage of the matching feature. Click here to learn more about what 401k plans are and how they work.

Roth IRAs – This is one of my favorite investment tools because of its long term tax benefits. One of the major differences between it and a Traditional IRA is that Roth contributions must be made with after-tax dollars. Rather than repeat myself, you can learn more about it by clicking here.

Action Step:

  • Ensure that you have a general understanding and confidence with the basic investments and investment accounts.

>>>Determine Your Investment Risk Tolerance Level>>>

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