The varieties of instruments that can be used to create an investment portfolio are as vast as the night sky has stars. The possibilities range from tangible assets like a home, physical possession of gold bars, to creation of a wine collection that you bet your future on. Some of these investments are much more speculative than others.
We have seen in the last 20 years how the housing market has oscillated and many individuals were overleveraged and unfortunately suffered the severe consequence of losing their homes to foreclose. The issue with items like wine is that it is a reduced market and can be difficult to sell.
That leads us to more mainstream investment structures that you commonly think of or hear about when retirement becomes a topic of discussion. The stock market is paramount to traditional investment strategies. However, all investment is not equal when dealing with the “Market.”
For the everyday trader it is wise to hedge your investments. Additionally, as you age, you want to protect that investment. This means you start with higher risk investment allocations and move towards more secure or fixed income instruments. Below are but a few of the most common ways you can invest in your future.
Benefits: Stocks, available to anyone, allow you to own fractions of a company and are easily purchased or sold. While holding a stock you pay no taxes on the value of that stock as it rises or falls. Certain stocks pay you quarterly dividends and you can reinvest that money into that stock and still be free of income tax.
Downside: Owning stocks outside a protected Roth or other retirement plan opens you up to capital gains tax, which is most likely more than your normal tax rate. Also, deciding on which stock to buy or sell and when you should do either requires research, strategic planning, and carefully watching the stock.
Benefits: By purchasing an annuity, you know exactly what the outcome will be. The purchase price is called the principal and backer of the annuity provides you a fixed interest rate based off of that principal for a fixed number of years. Therefore, when the annuity matures you know exactly your rate of return and there is zero risk of receiving less money.
Downside: Being a fixed-rate instrument for a fixed time prohibits you from taking advantage of other opportunities that may arise. Additionally, your rate of return may be outpaced by inflation. The maxim “A dollar today is worth more than a dollar tomorrow” means your investment is becoming less valuable every day.
Benefits: Mutual funds help hedge your investment by spreading the money around. Instead of a single stock, the mutual fund may invest in an index comprised of many companies within a given industry. This allows your retirement to grow faster than it might in an annuity, but also hedges against the risk of a single company.
Downside: Your ability to sell single companies and reap large returns in the short term is hampered. Also, the fund buys and sells the companies that comprise the fund and you have no control over fund investments.
Seek Professional Advice
Retirement options can be very difficult to decode and choose where and what to invest in. A professional planner will have the tools and ability to help you navigate your future.
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