What to look for when choosing investments
There's only one more decision to make before opening an account: choosing investments. Here's what to think about.
Like houses and cars, investments cost money. Low-cost investments help you keep as much as possible for your retirement.
This is a fancy way of saying "spread out your risk." You know, don't put all your eggs in one basket.
For example, you could hold stocks from thousands of companies through a mutual fund or ETF (exchange-traded fund). That way, if one company's stock price plummets, it will barely reflect in your account balance.
If you're not interested in digging into the details of every option out there, we'd recommend mutual funds or ETFs that cover the complete U.S. stock, U.S. bond, international stock, and international bond markets.
(As a guideline, put about 30% of your stock money in international stocks and 20% of your bond money in international bonds.)
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Mutual funds vs. ETFs
Both of these types of investments are diversified and professionally managed.
ETFs can also offer trading flexibility and other benefits, while mutual funds may have account options that aren't available with ETFs.
Index vs. active investments
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Choose investments for your goal
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Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
An ETF combines the diversification and professional management of a mutual fund with the trading flexibility and intraday pricing of an individual stock.
A type of mutual fund or ETF (exchange-traded fund) that seeks to track the performance of a particular market index (for example, the S&P 500 Index) by buying and holding all or a representative sample of the securities in the index, in the same proportions as their weightings in the index.
A type of mutual fund or ETF (exchange-traded fund) that seeks to outperform the return of a particular market index (for example, the S&P 500 Index) by buying and selling securities in a way that will maximize gains, based on a combination of in-depth research, market forecasting, experience, and expertise.
The way an investment portfolio is divided among various asset classes, such as cash investments, bonds, and stocks. Also known as "investment mix."