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Bankrate's 2008 Retirement Guide
Finding the funds
Sometimes, finding that extra bit of income can turn a retirement nightmare towards a happy ending.
Finding the funds
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.
Overview of investment vehicles
Mutual funds
- Target-date funds
- Index and managed funds
- Exchange-traded funds

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.

-- Posted: Nov. 10, 2008
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