Choosing the investments that are right for you is always a little bit of a guessing game. Of course, investing is inherently risky, and the unknown future is the main cause of that risk. But it’s certainly easier to decide how to diversify your portfolio and grow your retirement income when you understand the difference between the four most common investment types. Here’s our guide sharing basic definitions as well as some insight into these investments and the risks associated with each.
Definition of a Bond
A bond is issued to fund a special project by a company or at multiple levels of government. This could be research and development, building roads and schools, or even a war effort. Every person or entity that invests in a bond is essentially getting an “I.O.U” promising their investment will be paid back by a certain date, called the maturity date. You also receive a coupon for a certain interest rate that is a fixed rate of return on the bond.
At regular intervals until the bond matures, usually once every six months, you as the bondholder will receive a payment of the coupon rate of interest on your investment. When the bond maturity date arrives, your initial investment is paid back all at once.
Buying and Selling Investment Bonds
Another important notion that relates to bond investment is the concept of yield. This becomes relevant when you want to buy or sell a bond that has already been issued but hasn’t reached maturity. Yield is impacted by the difference between the coupon rate of the bond and the current coupons for new bonds in the market. This difference affects the price investors are willing to pay, and the profit the buyer will make on the bond. Bonds must be purchased through a broker, so talk with your broker more about this concept to find the right investment for you based on current and projected market conditions.
Bond Investment Risks
Generally, municipal and government bonds are considered an extremely safe investment. Some states even have laws that require governments to make bond payments before using their budget for any other purpose. It’s extremely rare for a city, state, or the Federal government to default on a bond.
Corporate bond issuers have a much higher risk of defaulting, but these investments also come with a significantly higher yield than a municipal or government bond. Always remember that all investment involves the risk of loss, even tried-and-tested options like a bond.
Definition of Stock
Each share of stock is a portion of ownership in a publicly traded company. It’s important to know that in most cases, this doesn’t guarantee you any input or managerial oversight in the company, unless that is a separate agreement you reach with the business, like in a startup or as an employee. Some stock does come with voting rights that allow shareholders to have some high-level control over the company’s direction. But generally buying stock is a vote of confidence in the company’s direction and future as it exists.
Buying and Selling Stock
Like bonds, stocks must be purchased through a broker. Full-service brokers are the financial experts we picture on the trading floor. They usually provide advice about finances and investment to their clients. Online brokers that offer less support bring a more modern approach and follow instructions to allow individuals direct access and control over their own investments.
Stock Investment Risks
The risks of stock investment are legendary, as are the returns. Overall, many professionals would agree one of the riskiest parts of investing in stocks is the role of emotions like greed or fear. Many individuals establish sell orders in their portfolios to automatically sell a stock when a certain rate of return is guaranteed. This takes some of the emotion out of the equation. As for the risks of losses, it’s important to consult with a financial professional about what percentage of your savings to invest in volatile options like stock, and how much to keep in options that are more stable. This will prevent fear from crippling you even at the lowest points of the market.
Definition of an Exchange-Traded Fund
Investors who are active in the stock market but looking for alternatives may consider an exchange traded fund (ETF). One share of an ETF represents a much smaller investment in the many stocks and bonds that are part of the fund. They work by tracking a specific index and aggregating some or all the bonds and stocks that are available in that index at any time. These could be relevant to industries like oil, or to certain nations and emerging markets.
Investing in an Exchange-Traded Fund
ETFs are traded through both traditional and online brokers, just like stocks. The price of each share of an ETF will go up and down throughout the day depending on the performance of the holdings in the fund. This option allows investors to distribute the risk of investing in a certain industry across many holdings, while also having the advantage of being able to trade directly with other investors based on real-time conditions in the market.
ETF Investment Risks
Just as the collective nature of the ETF brings benefits, it also brings some limits and risks. A lack of liquidity means you can’t only choose some of the investments in the fund to be part of. This is important to consider when choosing funds that are industry or region-specific—are you comfortable with the full scope of risk in the fund, and how the risk might change in the future? Depending on the way the fund is managed, these options may also come with high fees. Talk with your broker to get a clear picture of the fees you may be charged and why.
Definition of a Mutual Fund
Like an ETF, a mutual fund pools money from many investors to purchase stocks, bonds, and other investments. Investing in a share of the mutual fund represents a partial investment in all these holdings. However, a mutual fund is not publicly traded on the market. A mutual fund is also a company, led by a fund manager who is elected by a board of directors to make the best investment decisions for everyone involved in the fund. This is very different from an ETF, which functions by passively aggregating investments in a certain index without as much consideration of their potential performance.
Investing in a Mutual Fund
In 2018, 80% of mutual fund investors were investing through a retirement plan like 401(k) or IRA. In part, this is because participating in a mutual fund requires a minimum investment threshold of $1,000 or more, not just the cost of one share. It’s also important to know that trying to sell your retirement account shares in a mutual fund before age 59 ½ may come with penalties. Talk with your plan administrator or financial adviser to learn more.
Individuals can also buy shares of a mutual fund outside a retirement account, but your transaction will be with a broker who owns shares or with the fund itself. The same is true when you redeem your shares in the fund—you will only be transacting with the fund itself or a broker who represents the fund, not trading directly with other investors. Mutual funds are only traded once per day, after the stock market closes at 4pm ET.
Mutual Fund Investment Risks
One of the biggest risks of this investment type is fees. From transaction fees to administrative fees to trading fees, it’s important to understand why each charge is necessary. It’s also a good idea to annually benchmark your mutual funds’ performances against other mutual funds. If your fees are higher or your returns are lower than the average, it might be time to talk with your broker or adviser about the benefits of reallocating some or all of those funds into a different investment.
These are the main investment types that help individuals grow their wealth and prepare for retirement and other periods of life where money is needed. Some of these assets are easy to manage and sell while others require a lot of oversight but may yield a higher return. For clarification on any of these points or to understand what mix of investments is right to grow and sustain your income, we recommend consulting an experienced professional about your goals and willingness to be exposed to risk.
Did you know you can sell all or a portion of a life insurance policy, even term insurance?
Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash.
Contact us today to learn more.
This article was written by Leo LaGrotte from Life Settlement Advisors
As the Founder, President, and CEO of Life Settlement Advisors, Leo has spent more than 18 years working in the life settlement and viatical settlement industry. Leo’s career began as an investment advisor, operating his own independent firm for seven years. Through his work as an investment advisor, and as the President of Life Settlement Advisors, Leo has gained a broad knowledge of investments, life insurance, and the analysis and pricing of life insurance policies.
Is it time to start a new beginning? We are starting a new decade – 2020. And, to me it seems evident that it is time for me at eighty-four and a half years to begin thinking of what I will do and accomplish in the remaining years of my life.
To begin, I left my old life behind in Indiana, and move lock, stock, wife, and computer files to Texas. This move, by itself, was a significant change in my existence along with the climate and home environment, but it was even more of a change in my lifestyle. The relaxed and casual style of living here in Texas takes some adjustment. The people are outwardly very friendly, but that applies primarily to terra-firma, but is not evident on the highways and streets. These folks are in a constant state of hurry-up on the roads. And, in their pick-up trucks, they are a sight to behold and a challenge to beware of.
The historical significance of Texas is evident everywhere. This is a state deeply proud of its inheritance. The American and Texas Flags are prominently and proudly displayed everywhere. This not only occurs on holidays, but is evident year ‘round. These folks are proud of their history and like to show it. And, any discussion of disturbing the sanctity of a place like the Alamo is a kin to starting a war.
Back to my original thought process. How does someone at my tender age of the mid-eighties make the adjustment and keep a significant stance of some importance in their lives? I have come to the realization, you don’t do it by ignoring your surroundings and what’s going on in the community. I suppose it is a part of my genes to want to take a part and have a say. Voting has been and continues to be an essential part of my life. It is difficult for me to understand why anyone who values their lifestyle would ignore the essential and basic value of their ballot. It is difficult, in my estimation, to want to complain about or compliment leaders by ignoring the first Tuesday in November.
There is not time left, nor is there a need to dismiss a lifetime of learning to start over. A lesson I have taught myself is history has a way of repeating itself on a regular basis. All anyone has to do is to stay actively alert and be patient. The past will catch up with you, and more than likely, you have been there before. Remembering is an essential part of growing older. Keeping an active mind is essential to continuing the future growth pattern.
Keeping a sense of humor pays dividends. The world seems to want to continue drawing attention to calamity at every turn. There is no need to try to stem the tide of adverse news – it seems to pop-up at every juncture. So, it is hard to ignore, but you can smile and know this too will soon pass, as it always seems to do. Even the worse days have their sunsets, and the moon and stars seem shine as brilliant as before, I know this to be true because I have taken notice of it for years.
Minding ones physical and mental needs plays an important role in the future, as well. It pays dividends to listen to those who have provided the necessary information, lessons and medications to keep you active and alive through the years. They are there as helpful and useful resources to be relied upon and to stimulate your continued growth with healthful advice and action. I know personally that I would not have lived as long and well as I have without their constant nagging and assurance of success.
It helps significantly if you have planned ahead financially to maintain the where with all that is needed to assure the later years of life. Insurance can certainly go a long way toward that sound investment necessary in future years. The interesting thing to me is how easy it is to take those money steps at the early age, and let the wealth continue at a normal rate of growth until needed. There never seems to be as much as you desire, but it sure helps knowing that there is an investment that will pay dividends when needed.
To sum up the purpose of this article, it is not necessary to start over – just continue an active pattern of life that has held you in good stead through the earlier years of a lifetime. No matter what time is left, or the changes that will occur, know lessons earned and learned are there for the taking…then do so! You have lived a lifetime – keep on truckin’, as they like to say here in Texas!
This article was written by Norm Wilkens
Norm Wilkens is a nationally recognized speaker and writer, Norman Wilkens has traveled to forty-seven of the fifty states speaking on topics of marketing, advertising and public relations. His most noteworthy subjects include: Healthcare Marketing; Multi-generational travel and Baby Boomers - their contribution to society and economics. He is presently serving as Midwestern Contributor to California’s AAA WESTWAYS Magazine.
Among Wilkens’ current activities are the Butler University Alumni Board of Directors; Butler’s Central Indiana Alumni Chapter Board; Chairman of the Board of Visitors for the new Communication College of Butler; Board of Directors of Ruth Lilly Educational Foundation; Salvation Army of Indiana Advisory Board and as an Elder at Second Presbyterian Church of Indiana.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act contains a number of favorable provisions that will help Americans save more for retirement. However, the new law also contains an unfavorable provision that will affect nonspouse IRA beneficiaries who inherit accounts with substantial balances. As a result, some carefully constructed estate plans will be damaged. Here's the story.
Before the SECURE Act, the required minimum distribution (RMD) rules allowed a nonspouse beneficiary to gradually drain inherited IRAs over the beneficiary's IRS-defined life expectancy.
For example, Ann is 40 years old when she inherits her elderly Aunt Lilly's $500,000 Roth IRA. The current IRS life expectancy table estimates that Ann will live for another 43.6 years.
Ann must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by her remaining life expectancy as of the end of the current year. So, her first RMD would equal the account balance as of the previous year end divided by 43.6, which would amount to only $11,468, or 2.29% of the balance ($500,000 divided by 43.6 years). Her second RMD would equal the account balance as of the end of the following year divided by 42.6, which translates to only 2.35% of the balance. And so on until the account is fully depleted.
Before the SECURE Act, the RMD rules allowed nonspouse beneficiaries to keep an inherited account open for many years and reap the tax advantages for those years. With an IRA, this is sometimes called the "stretch IRA" strategy. It's particularly advantageous for inherited Roth IRAs, because the income those accounts produce can grow and be withdrawn free from federal income tax. So, under the pre-SECURE Act RMD rules, a stretch Roth IRA could provide protection from future federal income tax rate increases for many years.
The SECURE Act requires most nonspouse IRA and retirement plan beneficiaries to empty inherited accounts within 10 years after the account owner's death. This is an unfavorable change for beneficiaries who would like to keep inherited accounts (generally traditional and Roth IRAs) open for as long as possible to continue reaping the tax advantages.
This change won't affect account beneficiaries who want to quickly drain inherited accounts or account owners who empty their accounts during their retirement years. It only affects certain nonspouse beneficiaries who want to keep inherited accounts open for as long as possible to reap the tax advantages.
This change also won't immediately affect accounts inherited by a so-called "eligible designated beneficiary." This term refers to:
Important: Under the exception for eligible designated beneficiaries, RMDs from the inherited account can generally be taken over the life or life expectancy of the eligible designated beneficiary, beginning with the year following the year of the account owner's death.
The unfavorable changes to the RMD rules under the SECURE Act are generally effective for RMDs taken from accounts whose owners die after 2019. The RMD rules for accounts inherited from owners who died before 2020 are unchanged.
For More Information
Nonspouse beneficiaries should be aware of the changes to the rules for draining inherited accounts. If you inherit a traditional or Roth IRA with a substantial balance, contact your tax advisor to determine if the unfavorable 10-year rule applies to you and to answer any other questions you have about minimizing taxes on distributions.
In addition, individuals who were relying on the Stretch IRA strategy as part of their estate plan will have to rethink things. Your tax advisor can help with that, too.
This article was written by TMA Small Business Accounting
The TMA Small Business Accounting, P.C. staff have been delivering professional services to small businesses in Central Indiana for over 20 years. Having worked with hundreds of small business clients, we have significant expertise with a wide variety of service businesses in Indiana. We have especially strong experience and expertise in working with businesses in the healthcare (medical, dental, etc.) and foodservice (restaurants, caterers, etc.) industries.
WOW… that is the average annual cost in 2019 to receive services in a semi-private room in an Indiana skilled nursing facility, according to the Indiana FSSA.
Let me give you a few other startling facts.
So, as long as everyone has a couple hundred thousand dollars hanging around, they should be okay. But, what if there is a spouse at home? Will he/she have enough cash to stay in the world that they have become accustomed to? Let's talk.
I just attended a meeting where an elder law attorney was speaking about long term care costs and also Medicaid. He acknowledged that there are far more people with too few assets to cover these costs. That is when Medicaid comes in... after you are impoverished. He then spoke of the declining number of insurers in the long term care arena. And, he spoke highly of the new asset based products and life and annuity products with accelerated benefits.
As I sat there listening, I still am perplexed as to why more Americans are not taking advantage of these new products. We all know that a long term care type of emergency can devastate one's retirement plan. We all work hard to develop a steady income in retirement that is safe and stable But, most have not considered that they might have to change their addresses to the $78,324 per year semi private room.
If you have a long term care policy... congrats. If you don't you will probably never purchase one. If you have the new breed of asset based long term care/chronic illness products, I salute you. If you have an additional $200,000 - $400,000 of cash hanging around to pay for the room, I salute you.
But, if you feel a little vulnerable and would like some information about these products and strategies? Let us know, and we will put you in contact with a member of The Safe Money Places Agent Network that is licensed in your state.
This article was written by Raymond J. Ohlson CLU, CRC, CEO & President of Safe Money Places International, LLC
Mr. Ohlson entered the insurance business while completing his Bachelor of Science Degree at Ball State University. He quickly qualified for the Million Dollar Round Table (MDRT) of which he is a Life Member. He also received his Chartered Life Underwriter (CLU) designation from the American College in Bryn Mawr, Pennsylvania.
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