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Investing for your retirement
Turning a novice investor loose with an Internet investment account is like leaving a kid alone in a candy store.
Everything looks good and promises
such wonderful rewards, but overindulging
-- especially in the wrong confection -- can
bring with it a world-class upset stomach.
To begin, understand that all
investments have their inherent perks and
pitfalls.
Some may promise richer profits. Others come with less risk. That's why understanding how these investments function is such a vital step in crafting the best retirement plan possible.
Most investments can be categorized
as stocks, bonds or mutual funds.
| Depending
on your specific situation and goals,
you should invest in a mixture of
stocks, bonds and mutual funds. |
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| Overview of investment vehicles |
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Stocks
Also called equities, stocks are like sports
cars: They're fast, they're sexy and they
appeal to buyers that like a little vroom.
Indeed, few other asset classes
can match the potential of publicly held stocks.
They've been the cornerstone to most retirement
accounts because they've boasted higher returns
than many other investments, clipping along
at an average 10.4 percent a year between
1925 and 2006, according to Ibbotson Associates.
Stocks come in all shapes and
sizes -- for every industry imaginable, U.S.-based
and overseas alike -- and usually are categorized
as large-cap, mid-cap and small-cap. The term
"cap" is short for "market capitalization,"
which is computed by multiplying share price
by the number of a company's outstanding shares.
"Large-cap stocks tend to be
companies that are more established," says
Brett Horowitz, a Certified Financial Planner
at Evensky & Katz. "Small companies tend to
have more risk, and the extra risk you're
taking on leads to higher returns."
According to Ibbotson Associates,
small caps have grown an average 12.7 percent
annually over the past seven decades. The
annual 2 percentage point lead over large
caps compensated investors for the extra risk
they'd assumed.
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