Investing in Securities

Investing in Securities

What are securities?

Annuities

The best way to invest for retirement is through retirement accounts

Individual securities

Diversification

Asset allocation

Limited partnerships

Derivative securities (options, futures)

What are securities?

Contractual obligations (bonds) or certificates of ownership (stocks)

Generally highly liquid

Annuities

Insurance products that are similar to bonds or stock mutual funds

Offer tax-deferred growth in earnings

Tend to be expensive relative to ordinary mutual funds

Consider using annuities only after contributing the maximum deductible amount to retirement accounts

See "Bond and Fixed Income Investing for Everyone" for details about fixed annuities

See "Stock Investing for Everyone" for details about variable annuities

The best way to invest for retirement is through retirement accounts

See "Retirement Planning for Everyone" for details

Individual securities

Generally, don't buy individual stocks or bonds

Higher risk without higher overall returns

Best to invest through mutual funds

See "Mutual Fund Investing for Everyone" or "Stock Investing for Everyone"

Diversification

Diversify across asset classes

Diversify within asset classes

Diversify over time

See "Mutual Fund Investing for Everyone" for details

Asset allocation

You need to select different asset classes for different goals

Diversify your holdings to reduce risk and increase returns

See "Mutual Fund Investing for Everyone", "Retirement Planning for Everyone" and "Bond and Fixed Income Investing for Everyone" for details

Limited partnerships

Used to be popular as tax shelters

Tax Reform Act of 1986 greatly reduces attractiveness of limited partnerships

Usually illiquid

Sold with high commissions -- typicaly 8 percent

Will complicate your taxes

May increase likelihood of tax audit

Derivative securities (options, futures)

Useful as a form of insurance for large companies or financial institutions

Can be useful for income tax purposes

Provide high degree of leverage

Very poor as investments

Perhaps 75 percent of derivative speculators lose money

The typical futures player quits within one year

Commissions are very high

Downside is limited, but speculators lose 100 percent of their invest when their derivative expires out of the money

Very few stock investors lose 100 percent of their investment on a regular basis