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| Investment Options:
Tools of the Trade |
| Like any job, you need to learn
how to use the tools of the trade in order to invest well. After all,
a carpenter doesn't use a screwdriver to pound in nails. In investing,
you first need to determine your goal, and then choose the right
investments to accomplish it. |
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| Of course, you have a lot of tools to choose from.
These days you can invest in everything from government bonds and
Exchange Traded Funds (ETFs) to baseball cards and complex alternative
strategies. However, in most cases you're best off dividing most of
your money between the three major types of investments with good long-term
return records: cash, bonds, and stocks. All three should be available
in your retirement plan. |
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| Cash includes such things as savings, money-market
accounts and short-term CDs. Cash is generally considered safe
(you don't have to worry about your savings account losing money),
but it doesn't earn you much money. Bonds (loans you make to the
government or to a company in exchange for interest payments)
pay you more than cash and are relatively safe. That's because
they promise regular payments and the eventual return of your
investment. And if a company should collapse, bondholders
are paid off before stockholders. |
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| However, you probably won't make enough from bonds
to pay for much of your retirement. That's where stocks come in.
Stocks, which give you partial ownership of a company, can jump up
and down in price a lot, but they're also the highest-returning of
the three investments. |
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| Within each asset type, you also can diversify among
different security issuers, industries or geographic locations, and
market capitalization levels. The market capitalization level is the
total equity market value of the company, expressed in millions of
dollars. It equals shares outstanding times the stock price. Fund
investors also can diversify among various management investment
styles, such as growth and value. |
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| Your goal is to put together a portfolio of investments
that are unlikely to all move in the same direction at once. And although
there are other kinds of investments available to you—including gold, real
estate, and collectibles (such as art)—they're usually more speculative
and probably aren't as good of a match for your retirement assets. |
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