Investing: General Tips
Investors today have a wide range of choices: stocks, bonds, mutual funds, Treasury securities (including savings bonds), options, commodities, commodity futures, real estate investment trusts (REITs), variable annuities, and many more. You must investigate before you invest—and remember that every investment involves some degree of risk. These investments are not insured by the federal government if they lose money or fail, even if you purchase them through a bank or credit union that offers federally insured savings accounts.
Make sure you have answers to all of these questions before you invest:
- 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 all the money you paid for them. Other investments, such as limited partnerships, often restrict your ability to cash out your holdings.
- What can you expect to earn on your money? While bonds generally promise a fixed return, earnings on most other securities go up and down with market changes. Also, keep in mind that just because an investment has done well in the past, there is no guarantee it will do well in the future.
- What type of earnings can you expect? Will you get income in the form of interest, dividends, or rent? Some investments, such as stocks and real estate, have the potential for earnings and growth in value. What is the potential for earnings over time?
- How much risk is involved? With any investment, there is always the risk that you won't get your money back or the earnings promised. There is usually a tradeoff between risk and reward: the higher the potential return, the greater the risk. The federal government insures bank savings accounts and backs up U.S. Treasury securities, including savings bonds. Other investment options are not protected.
- Are your investments diversified? Some investments perform better than others in certain situations. For example, when interest rates go up, bond prices tend to go down. One industry may struggle while another prospers. Putting your money in a variety of investment options can help to reduce your risk.
- Are there any tax advantages to a particular investment? U.S. savings bonds are exempt from state and local taxes. Municipal bonds are exempt from federal income tax and, sometimes, state income tax as well. For special goals, such as paying for college and retirement, tax-deferred investments are available that let you postpone or even eliminate payment of income taxes.
Understand investment vehicles.
Not all investment vehicles are created equal or work for your personal financial goals. Some provide steady income and are low risk, but yield small returns on investment; others may provide significant returns, but require a long term investment commitment. There is a wide assortment of investment vehicles available. Some of the most popular include: mutual funds, traditional IRAs, Roth IRAs, savings bonds or bond funds, stocks, and certificates of deposit.
Some investments pay out earnings on a regular (quarterly, monthly, or annual) basis, while others pay out earnings at the end of the investment period or may have age requirements for when you can withdraw your money without a penalty. Make sure your investment income stream matches your investment timeline.
You should also consider the tax ramifications. If you are saving for retirement or for education, consider investments that offer incentives for saving for a particular purpose. Your contributions for some investments are tax deductible, but the earnings are not taxed (e.g. Roth IRA); your contributions to other investments may not be taxed, but the earnings are taxed (e.g. traditional IRA).
You don't have to put all of your money in one investment. Consider diversifying your investment portfolio by placing your money in several investment vehicles. This can protect you from risk; while one of your investments may be performing poorly, another one of your investments can make up for those losses.
| Type of Investment | What is it? | Risk Level |
|---|---|---|
| Traditional IRA | Traditional IRA is a personal savings plan that gives tax advantages for savings for retirement. Investments may include variety of securities. Contributions may be tax-deductible; earnings are not taxed until distributed. | Risk levels vary according to the holdings in the IRA |
| Roth IRA | A personal savings plan where earnings that remain in the account are not taxed. Investments may include a variety of securities. Contributions are not tax-deductible. | Risk levels vary according to the holding in the IRA. |
| Money Market Funds | Mutual funds that invest in short-term bonds. Usually pays better interest rates than a savings account but not as much as a certificate of deposit (CD). | Low risk |
| Bonds and Bond Funds | Also known as fixed-income securities because the income they pay is fixed when the bond is sold. Bonds and bond funds invest in corporate or government debt obligations. | Low risk |
| Index Funds | Invest in a particular market index. An index fund is passively managed and simply mirrors the performance of the designated stock or bond index. | Risk level depends on which index the fund uses. A bond index fund involves a lower risk level than an index fund of emerging markets overseas. |
| Stocks | Stocks represent a share of a company As the company's value rises or falls, so does the value of the stock. | Medium to high risk |
| Mutual Funds | Invest in a variety of securities, which may include stocks, bonds, and/or money market securities. Costs and objectives vary. | Risk levels vary according to the holdings in the mutual fund. |
The Securities and Exchange Commission (SEC) requires public companies to disclose relevant financial information to help you make sound decisions. You can view the text of these files online. You can also call SEC's toll-free Investor Information Service at (800) 732-0330 to obtain free publications and investor alerts or to learn how to file a complaint. The Financial Industry Regulatory Authority (FINRA) also provides up-to-date market data and information for a wide range of stocks, bonds, mutual funds, and other securities through its Market Data Center (available at http://www.finra.org).
The following companies rate the financial condition of corporations and municipalities issuing bonds. Their ratings are available online and at many public libraries:
- Standard and Poor's (http://www.standardandpoors.com/)
- Moody's Investors Services (http://www.moodys.com/)
For ratings of mutual funds, consult magazines such as Kiplinger's Personal Finance, Money, Consumer Reports, Smart Money, and Worth. To compare expenses, use the Mutual Fund Expense Analyzer available at http://www.finra.org/.
USA.gov Web site. (n.d.). Investing tips. Retrieved December 23, 2016, from http://www.usa.gov/