When it comes to your retirement and brokerage accounts, choosing the right investments is important. Learning about a few basic terms and concepts goes a long way in helping you choose the appropriate investments.
Money Markets invest in very short-term debt instruments and high-quality securities to maintain capital preservation. This investment presents the lowest level of market risk and lowest potential return.
Bonds are debt obligations issued by governments or corporations. When you purchase a bond, you are lending your money to the entity for a length of time. In exchange, the entity will pay you interest until the bond reaches its maturity date, when you will also receive the full loan amount. Bonds will typically pay higher dividends than money market accounts.
Stocks are a security that allows you to purchase ownership in a company and represents a claim in the company’s assets and earnings. Stocks are more volatile than bonds or money markets but can provide greater potential return on your investments.
Mutual Funds allow you to pool your money together with other investors to purchase a collection of bonds, stocks, money markets, and other securities. Mutual funds offer a higher level of diversification and are managed by professional investors.
Exchanged Traded Funds (ETF’s) are a collection of diversified assets that trade on the stock exchange. ETF’s consist of a basket of individual securities that act as one fund, instead of buying each security, that has similar characteristics as a stock. ETF’s trade in real time on the stock exchange market, where as mutual funds trade only once per day at market closing. They are known for their low overall cost and most try to achieve the same return as its given market index.
Target-Date Retirement Funds are an age-based approach to investing for your retirement. Each target-date fund is a collection of mutual funds with a mix of different investments for diversification. With a retirement date in mind, the asset allocation will gradually shift based on the participant’s years until retirement, becoming more conservative as the participant approaches their retirement date. These funds are professionally managed, so this may be a good option for participants who do not want to actively choose their investments over time.
We all want to maximize and grow our wealth to the fullest potential. Talking to a financial advisor can help steer you in the right direction to accomplish your financial goals for today and for retirement.
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