20选5走势图: Investing 101
"For herein Fortune shows herself more kind than is her custom; it is still her use To let wretched man outlive his wealth To view with hollow eye and wrinkled brow An age of poverty."
In The Merchant of Venice, Shakespeare aptly described one reason we invest-so we don't outlive our wealth. (Note that a person who is 65 today is expected to live to 84, if male, and 88, if female.) Without an investment plan that's sensitive to both immediate and long-term goals, as well as to the level of risk to be taken to achieve those goals, personal investment success becomes difficult, if not impossible, to achieve.
Building wealth and protecting it from the effects of inflation and taxes are two major investment objectives common to almost every investor. Some are more successful than others in achieving these goals. If your wealth isn't growing because taxes and inflation are nibbling away at what you've accumulated, you need to re-examine the ways you save and invest.
In "Money Wise" (November 1995), we told you how to determine your level of risk tolerance. This month, we give you an overview of some of the many investment options that can help you reach your goals.
Even though past performance is no guarantee of future results, historically, investing in common stocks has proved to be the best way to build and protect wealth over the long term. But many Americans, afraid of losing their principal, invest heavily in lower risk debt securities.
Bonds are debt securities issued by organizations to finance various projects. All bonds have certain features in common, including coupon, maturity, face or par value, and credit quality rating. When you buy a bond, the issuer promises to pay a certain rate of interest (called the coupon) for a certain period of time (until the bond matures). Interest is often paid semiannually. The principal is also called the par or face value.
Two major rating services, Moody's and Standard & Poor's, assign letter ratings to bonds to give investors an idea of a bond issue's quality and the issuer's ability to make timely payments of interest and principal. The highest rating is AAA, then AA, A and so on down the line to D, the lowest rating.
If you're considering an investment in bonds, don't look exclusively at the interest rate paid. Think of bonds as you would a loan. Your brother-in-law may not be very good at paying back loans (if he were a bond, he'd get a lower quality rating), so if you were going to lend him $10,000 for five years, you'd ask him to pay more interest than if he had a great repayment history. And you probably wouldn't want to lend him money for 30 years. Bonds are the same: The longer the maturity or the lower the rating, the more interest you should receive.
There are several categories of bonds: those issued by corporations, the federal government and its agencies, state and local governments, and foreign governments.
1. Corporate bonds. There are several types of corporate bonds; they're classified based on the collateral that backs the payment of interest and repayment of principal. Corporate bonds can be secured by real estate (mortgage bonds), equipment (equipment obligations), stocks and bonds (collateral trust obligations), or the general credit of the issuing company (debentures).
Corporations can retire debt prior to maturity in several ways, including calling in their bonds and converting them into other securities. If your bonds are called or converted, you'll receive your principal back and interest payments will cease or change.
Corporations with lower quality ratings need to offer greater incentives to investors in the form of high yields. These higher-yield, lower-rated bonds are often called "junk bonds" because there is a greater likelihood investors' interest and principal will be at risk.
2. Federal government bonds. The federal government, like corporations and state and local governments, borrows funds (through the sale of Treasury securities) to conduct its business. Since Treasury securities are backed by the U.S. government, they have the highest safety rating. There are three kinds of Treasury securities: bills, notes and bonds.
Treasury bills are short-term securities with maturities of one year or less. They are issued at a discount from face value, and they are issued in minimum denominations of $10,000, with $5,000 increments available above $10,000.
Treasury notes are intermediate-term securities, with maturities ranging from one to 10 years. Denominations range from $1,000 to $1 million or more.
Treasury bonds are long-term investments, with maturities of 10 years or longer, issued in minimums of $1,000.
You can buy Treasury securities directly from the U.S. Treasury or from banks or brokerage firms.
Agencies of the U.S. government also issue securities; while these are not obligations of the Treasury, they have an inherent backing by the federal government and are considered to be of the highest credit quality. You may have heard of the "Mac" family-Ginnie, Fannie and Freddie Mac, otherwise known as the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Association. These securities are based on pools of mortgages and are called "pass-through securities" because the interest and principal paid monthly by homeowners is passed through to investors.
3. State and local government bonds. Home is where the heart is, and it's also where investors can find interest-bearing investments free of state and federal income taxes. If you purchase municipal bonds in your state, the interest paid on these bonds is tax-free. Interest paid on bonds issued by the Commonwealth of Puerto Rico is tax-free in all 50 states. (For some investors, this income may be subject to the federal alternative minimum tax, a flat tax applied to wealthy taxpayers to ensure they pay at least some tax.)
4. Foreign government bonds. Foreign governments issue bonds to finance their projects, too; sometimes interest rates are higher than those of U.S. government bonds. But before you invest, be sure you understand the inherent risks in foreign securities, including currency fluctuations and political and social instability.
If safety is your major concern, you may think your best bet is to invest in fixed-income securities, spreading your investment among several types of bonds or, if your most important goal is safety of principal, sticking with U.S. government securities. But after inflation is taken into account, this risk-free concept becomes questionable.
According to Chicago-based research firm Ibbotson Associates, over the long term, Treasury bills barely outperformed inflation, earning an annual 3.7 percent return while inflation increased at 3.1 percent per year. In fact, after taxes and inflation, many T-bill investors actually experienced a negative return.
Stocks, as represented by Standard & Poor's weighted index of 500 stocks (which provides an indicator of price movement), have clearly outpaced inflation-and the taxman-with an average pretax total return, including reinvested dividends, of 10.2 percent per year from 1926 to 1992, according to Ibbotson Associates.
There's no guarantee this trend will continue, but consider that the 66-year period between 1926 and 1992 includes times of war and peace, growth and decline, bull and bear markets, inflation and deflation. Common stocks clearly give you the potential to fulfill your objectives of building and preserving wealth.
Buying stock in a company means buying part ownership in that business. As a shareholder, you receive capital appreciation (the difference between your purchase price and the current market value) and/or dividends (generally a quarterly payment that represents a percentage of the company's earnings). Of course, stock prices and dividends can fall if the company doesn't do well.
Stocks can be classified into several broad categories:
Blue chip stocks are the high-quality stocks of major companies; they generally have long and unbroken records of earnings and dividend payments.
Growth stock companies are those whose sales, earnings and market share are expanding faster than the industry average and the economy in general. These companies usually retain most of their earnings to finance expansion and pay little, if any, dividends to shareholders.
Defensive stocks are from companies that provide necessary services, such as electricity and gas; essential goods, such as pharmaceuticals; or staples, such as food or soft drinks. Due to the constant demand of these products, the stocks provide a degree of stability during periods when the economy is declining.
Income stocks are generally attractive to people seeking immediate income, particularly seniors and retirees. Income stocks, primarily public utilities, usually pay high dividends in relation to their market price, providing shareholders with greater quarterly income.
Cyclical stocks are those of companies whose earnings are tied to the business cycle. When business conditions are good, the company is profitable and the common stock price usually rises. When conditions decline, the company's earnings and stock prices generally fall. Steel, cement, machine tools and automobile companies are considered cyclical stocks.
Seasonal stocks' performance fluctuates with the seasons. For example, retail companies' sales and profits normally increase at Christmas and the beginning of the school year.
Avoiding The Pitfalls
Many investors who manage their own portfolios make common mistakes that lead them to the false conclusion "It's impossible to make any money in the stock market." These mistakes include:
- failure to establish clear objectives
- selecting securities that are not consistent with your objectives
- purchasing too many or too few securities
- taking profits too soon
- failing to minimize losses promptly
- buying a stock based on a "tip" rather than investigating its merits
- not adjusting to changing market cycles
- not fully exploring alternative investments
- failing to follow a disciplined approach
Most investors don't have the time or expertise to search through the thousands of investment possibilities to select a portfolio that suits their individual needs. Professionally managed portfolios make investing easier. Instead of selecting individual stocks or bonds, these investments let you pool your money with that of other investors in a managed account. During the past 15 years, mutual funds and other types of investment pools have gained enormous popularity. These investments have several characteristics in common-small initial investment, diversification, liquidity and professional management.
For a management fee and a sales charge, mutual fund managers pool investors' money and invest it in various securities. Whether you plan to invest a little or a lot, you'll find mutual funds in many varieties based on investment objectives and risk tolerance. Here are the broad categories:
Income funds seek high current income by investing in securities paying high dividends, such as government and corporate bonds, utilities and high-dividend stocks. Because of their high income, these funds are somewhat insulated from some of the stock market's volatility, although they are sensitive to interest rate changes.
Growth funds, which seek capital appreciation by investing in large, well-established companies, are often called "blue chip" funds. Most pay dividends, although income is usually a secondary consideration.
Aggressive growth funds strive for maximum capital appreciation and are often considered the riskiest of equity funds. They may concentrate on selecting small company growth stocks or may use speculative techniques to obtain high profits. The greater the potential profit, the greater the risk.
Balanced funds strive to minimize risk by allocating dollars to stocks, bonds and cash. They usually invest in higher-grade securities and are appropriate for investors who want a good return with lower risk.
International and global funds allow individuals to invest in markets outside the United States and in foreign securities that trade on foreign exchanges. While global funds may invest in both U.S. and foreign securities, international funds deal exclusively in securities outside the United States. Both types of funds increase in value when the dollar falls, allowing investors to benefit from changing trends abroad.
Total return funds seek long-term appreciation through a combination of dividends and capital gains. They often appear in long-term retirement and education portfolios.
Bond funds have several different approaches and can be divided into four classes: taxable, tax-free, high-quality and high-yield. They may include taxable, tax-free, U.S. government, foreign government, corporate or any combination of bonds. They may also vary in the maturities of bonds selected.
Bond fund share prices move in the opposite direction of interest rates. As with all bonds, when interest rates rise, share prices fall. In addition, the longer the maturity of the issues in a bond fund, the more volatile the share price.
Money market funds invest in short-term IOUs from industry and government. Interest is usually accrued daily and often credited monthly. Some allow you to write checks on the balance of the account. These funds are designed to have no price volatility, but this is not guaranteed or insured by the U.S. government, and there can be no assurance that the fund will be able to maintain a stable net asset value.
Specialized or sector funds concentrate their investments in a particular industry or region, such as health care, utilities, precious metals, technology or the Pacific Rim. Since they aren't diversified outside the particular area selected, these funds can be more volatile than diversified investments.
Regardless of the type of mutual fund selected, you should always request a prospectus from the investment company to learn more about the fund before investing. Mutual funds should be regarded as long-term investments, with a time frame of at least three to five years.
One final note on mutual funds: Many investors make the mistake of chasing last year's hottest fund, and that's what it turns out to be-last year's best. Probably more important than the individual stocks, bonds or funds selected is the percentage of your portfolio dedicated to each asset class. This is when a financial advisor comes in handy.
Last year's strong stock market lured speculators and savers alike to the offices of stockbrokers and financial planners. But choosing the right financial advisor is at least as important as selecting the investments themselves. A bit of preparation before you meet with a potential advisor can save you a lot of headaches later.
At the first meeting, be prepared to share some general information about yourself, such as family status, financial resources and goals. The advisor should also ask you these questions:
1. What do you want your money to do? Do you seek high monthly income from your investments? Do you want them to grow now and pay later? Or would you like to achieve both goals?
2. What are your expectations for a return on your investment? Almost any financial goal can be reached if sufficient time is available and an appropriate level of risk is allowed.
3. What is your risk tolerance? Although the old adage "No pain, no gain" is often true, don't let this attitude prevail with your hard-earned money.
4. What time frame do you have in mind for achieving your financial goals? Don't expect to double your money with no risk in six months. If someone tells you they can perform this feat or anything even remotely close, run for the door.
5. How much contact with me do you expect? If your investments involve a group of highly rated mutual funds, a semiannual review might be sufficient. If you prefer stocks, your contact should be more frequent. Let the advisor know what you expect, and be sure both of you are comfortable with the arrangement.
6. How much time do you want to devote to managing your money? A hands-on approach is needed for a stock portfolio, even if you have a financial advisor. Mutual funds or professional money management are far less time-consuming.
Some additional considerations:
1. Don't work with a financial advisor or broker who tells you that if you don't invest now, you'll never get another opportunity. Stocks go down as well as up, and you must feel comfortable with the situation before you invest.
2. Don't invest in anything you don't understand. You should understand your advisor's recommendations so well that you can clearly explain them to someone who understands even less than you do.
3. Don't be afraid to ask the price of advice. A client of mine confided I was the second broker she had interviewed. When she asked the first candidate what his services cost, he replied, "If you have to ask, you can't afford it." He was right: No one can afford to work with a jerk!
4. Don't use an advisor without investigating his or her reputation. Call the National Association of Securities Dealers at (800) 289-9999. Their hotline can tell you if there have been customer complaints about or disciplinary action against a registered representative.
No matter whom you decide to work with, be sure you feel comfortable enough to ask questions. This may be all the money you'll ever have, and the financial advisor you choose should be as interested as you are in doing the best you can with it.
Top Software And Online Services For Investors
Quicken Deluxe5, $59.99 (Windows)
Intuit, (800) 816-8025
Quicken Deluxe 5, available on floppy disk or CD-ROM, adds investment management to Quicken's standard financial management capabilities. Using a modem, Quicken Quotes lets users look up prices for more than 100,000 stocks and mutual funds and update their portfolios automatically, while a Mutual Fund Finder helps users choose funds that fit their financial profiles.
Managing Your Money Plus CD-ROM, $50 (Windows)
Meca Software, (800) 288-MECA, (203) 255-1441
CD-ROM-based Managing Your Money (MYM) Plus integrates bestselling financial management program Managing Your Money for Windows with additional financial information modules. It includes advice from Andrew Tobias, one of the original creators of MYM, on topics ranging from buying a home to investing in mutual funds. There's also a library of more than 150 personal finance articles.
MYM Plus includes software to access CompuServe's extensive financial resources. QuoteLink automatically downloads current stock, bond and mutual fund prices from CompuServe and posts them to your portfolio.
WealthBuilder 4, $99.95 (Windows)
Reality Online, (800) 521-2475, (610) 277-7600
Reality Online's WealthBuilder takes you through data-gathering, goal-setting, decision-making and, finally, investing to help create a portfolio that will let you retire in comfort. After asking a series of questions, WealthBuilder determines your financial blueprint, then advises you accordingly.
WealthBuilder's integration with Reuters Money Network gives users access to this huge online financial database, and WealthBuilder and Reuters Money Network jointly track your investment performance. (Reuters also works with Quicken and Microsoft Money.)
CompuServe has numerous sources for researching stocks, mutual funds, bonds and commodities, and even gives users a chance to chat with other investors in the Investors' Forum. An extensive list of newspapers and publications, such as Fitch Investors Service's Bond Reader and IBM/Donoghue's MoneyLetter, gives CompuServe users an edge in planning finances.
In addition to getting the information needed to make informed decisions, you can access discount brokers Quick & Reilly and E*Trade Securities 24 hours a day.
For up-to-the-minute information on stock prices, America Online's (AOL) StockLink is an extensive, easy-to-use resource. Information on more than 30,000 securities can be downloaded to track your investments.
Plenty of investment companies can be found on AOL, including Vanguard, a no-load mutual fund company, and Morningstar, which provides detailed information on more than 4,000 mutual funds. The Fidelity Investor Center includes a mutual fund library, brokerage services, investment and retirement planning, and more. Fidelity can also be found on the World Wide Web at //www.fid-inv.com.
Networth Galt Technologies
(412) 681-6100, //networth.galt.com
Galt Technologies' Networth is the place to be for mutual fund information and financial newsletters. This World Wide Web page is easy to use and has a great graphical interface.
After opening a free account on Networth, users can access mutual fund profiles and performance reports from the Mutual Fund Market Manager, research articles from financial and business newsletters, find market analyses on mutual funds, and more. The system protects you by withholding investment applications until you have read the fund's online prospectus. -Cassandra Cavanah
Compuserve, 5000 Arlington Centre Blvd., P.O. Box 20212, Columbus, OH 43220;
Galt Technologies, 5001 Baum Blvd., #750, Pittsburgh, PA 15213;
Ibbotson Associates, 225 N. Michigan Ave., #700, Chicago, IL 60601, (312) 616-1620;
Meca Software, 55 Walls Dr., Box 912, Fairfield, CT 06430;
Reality Online, 2200 Renaissance Blvd., King of Prussia, PA 19406.