Investing: How to Lower the Risk, part 3
By Keith Bunn Jr.
April 28, 2013
Good morning! Before we get into part 3 of this series, let's review last week's blog for a bit.
C.D.'s are Certificate of Deposit, and you get them at your local bank. They are low risk accounts and make a horrible rate of return. And if you take your money out early, you have to pay a penalty for early withdrawal.
Money Market accounts are another low risk investment you get with an investment broker. Again, these accounts make a horrible rate of return, but you can normally get them with either check writing privileges or a debit card or both. They also don't penalize you if you write a check or use the debit card as long as you don't go over a specific amount at any one time. Money Markets are great place to keep your emergency funds.
Single Stocks: When you buy stock in a company, you are buying a very small piece of the company. The rate of return on these stocks can be high, but also carry high risk with them for the simple fact you are not diversified enough. If the company is profitable, they may issue portions of those profits to you called dividends. I do not recommend single stocks to anyone for that reason, no matter what company the stock is in.
Bonds and Mutual Funds
Bonds are a debt instrument which a company that we loaned money to now owes us that money back plus interest. Typically, bonds have an end date of when they have to be paid off. So in a sense, bonds are nothing more than an I.O.U. They are a high risk investment because they act like a single stock, meaning, their ability to pay you back is based on their performance. So I don't recommend bonds.
Mutual Funds are where investors like you and I, pool our money together to invest into 90 to 200 companies. Professional portfolio managers manage the pool or fund and our return comes as the value of the fund increases. Simple put, in just one mutual fund, you and I could be investing anywhere between 90 to 200 companies at one time. In other words, we are being diversified! Which lowers our risk. Now what makes mutual funds even better, is that there are all kinds of different mutual funds out there to choose from. And the name or kind of mutual fund it is, tells you what is inside the mutual fund. here are a few examples. If it is a Bond Mutual Fund, you would be investing in different kinds of bonds. If you bought a fund that had Dove soap or Ben & Jerry's Ice Cream in it for example, those are foreign companies so that fund would be an International Stock Mutual Fund. A fund that had companies in it that are growing like AT&T, Fed Ex, or Micro Soft would be called a Growth Stock Mutual Fund. I think you get the point.
The thing I like about mutual funds is that there are all kinds of funds out there and each one of them have tons of companies inside them that make you diversified. Because if some of those companies inside the fund goes down in value, the others maybe going up, making up the difference. This is a good way for those of you out there that like a specific company and want to invest in it, and to lower your risk. Just buy a mutual fund that has that company in it. A good investment broker should be able to help you find that fund.
1) Have you bought Bonds before? If so, how did they work for you?
2) have you bought Mutual Funds before? If so, how did they work for you?
3) Do you feel confindent in your investments?
4) Do you feel like you are diversified enough?
The main reason I do all this is to give people hope and to try to inspire others. To make them think about their finances, whether they are young or old, so they can win financially.
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