CHOICES

Most investors choose to distribute their dollars across a variety of investments. Your invested assets may be allocated to …

Stocks (shares of company ownership)

Large-cap, mid-cap and small-cap equities (shares of large, mid-sized & small companies)

Bonds (fixed-income investments redeemed with interest at maturity)

U.S. Treasury notes Corporate bonds Municipal bonds Mutual Funds Funds which buy and sell stocks & bonds according to an investment strategy. This broad category also includes:

Index funds (which try to replicate the performance of a stock market index)

Target-date funds (which adjust the investment mix according to an investor’s age and risk tolerance)

Exchange-traded funds (funds that track an index, a commodity or a basket of assets and combine the features of index funds and stocks)

Alternative Investments (asset classes with little or no correlation to the stock market)

Commodities (“raw materials” such as precious metals, crops & energy products)

REITs (real estate investment trusts )

Currencies (foreign exchange markets)

Managed futures (futures contracts)

COMPOUNDING

Time is one of the best friends of any investor. The earlier you start, the more time your invested assets have to compound.

You won’t retire purely on the money you invest today. You’ll mostly retire on the earnings that your investments generate over time.In a tax-deferred investment account, the earnings are never taxed while the account grows; you only pay taxes on the accumulated earnings when they are withdrawn. Your investment earns interest, and it is reinvested – so you earn interest on your interest.

Here are three hypothetical examples of compounding can work.

Investor A puts $500 per month in a tax-deferred retirement account from age 18 to 45. That’s $162,000 in total contributions. At an annual return of 9% (optimistic, but within reach), Investor A end ups with about $672,000.

Beginning at age 22, Investor B puts $2,000 annually in a tax-deferred investment account for nine straight years, then stops. At age 65, the originally invested $18,000 (earning 6% annually) has grown to nearly $580,000.

Investor C starts putting $100 a month in a tax-deferred retirement account at age 22. If that account returns 10% a year, Investor C will have about $865,500 at age 65.

DIVERSIFICATION

Naive investors stake most of their financial futures on one or two key investments, or become so enamored of a particular investment type that they get burned when it does poorly. This is why it is so important to invest in multiple investment classes. If one kind of investment does poorly in a given year, other kinds of investments may do well - and the performance of your portfolio can balance out. Investors who don’t diversify may find themselves riding the Wall Street rollercoaster - elated when their investment performs well, and crushed when it doesn’t.

SAVE, SPEND, INVEST, OR DONATE?

If you receive inherited or gifted assets, what should you do with them?

Today, it can be tempting to see wealth in terms of material items and immediate gratification. But spending inherited of gifted wealth may come with an opportunity cost – if invested, that money could have to the potential to help you greatly improve your financial future.

For the long run, the best choice is often to save and invest the inherited assets. In certain situations, it may be more advantageous to direct the inherited wealth to charity. There is also the power of social capital to consider – using wealth to make a change in the world, whether it is down the block or on another continent.

Before you make a move with your own money or inherited wealth, be sure to look at all your options and talk with a financial advisor. The more knowledge you have, the more informed your decisions will be.

[note]This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.[/note]