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Smart investing


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Great information on investing and saving for your future.

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Smart investing

  1. 1. Prepared especially for the Armed Forces • Investment Scams • Risk & Return • Compounding • Investment Strategies • Saving for BONDS STOCKS MUTUAL Retirement • Asset FUNDS Allocation V I R G I N I A B. M O R R I S an d k e nn e t h M . M O R R I S©2008 by Lightbulb Press, Inc. All Rights Reserved.
  2. 2. c o n t e n t s 2 Basic Training Red Flags 18 4 Saving Scams That Target the Military 20 6 Investing Keep Your Eyes and Ears Open 22 8 Balancing Risk and Return When You Need It 24 The Rules of Engagement 10 Additional Resources 25 Retirement Planning 12 State Securities Regulators 26 Where You Invest 14 Glossary 28 Avoiding Inappropriate Investments 16©2008 by Lightbulb Press, Inc. All Rights Reserved.
  3. 3. S m art I N V E S T I N G S m art I N V E S T I N GBasic Training fee. The APR you are charged can rise signifi- by visiting The advantage of cantly. This means it will cost you even more to checking your FICO score is that it’s the one most borrow in the future. creditors use.Learn the basics to keep your finances in line. Using credit only in an emergency can help you control the amount you spend and keep your INSURANCE finance charges to a minimum. No matter how well you plan, the unexpectedWhen you’re in the military, life can change USING CREDIT WISELY can always happen. Insurance policies canquickly. You could be deployed or relocated to When you don’t have cash on hand, you may be CHECKING YOUR CREDIT help protect you in case it does. The US govern-a new duty base. You could be promoted, with tempted to borrow to pay for things you need You’re entitled to one free credit report each ment offers low-cost health, disability, and lifean increase in pay grade. You could marry, have or want. While credit is convenient, it comes year from each of the three national credit insurance options exclusively to servicemembers,children, or get divorced. at a price, sometimes a very steep price. That’s bureaus—Equifax, Experian, and TransUnion—by veterans, and their families. To find out more The better shape your finances are in, the because in addition to repaying the money you going to or calling about the plan that might be right for you,easier it will be to move smoothly from one stage owe, you’ll also have to pay a finance charge, 877-322-8228. The reports provide a detailed visit the VA’s Insurance website atof your life to the next. So, if you’re not already in which is a fee for using the money you’re borrow- picture of your credit use that stores, banks, driver’s seat on the road to a secure financial ing. As a rule, the more money you borrow and insurers, and others check before doing businessfuture, it’s time to shift gears. the longer you take to repay it, the more you’ll with you. AVOIDING DEALS pay in finance charges. The better your credit history, the higher the You have lots of choices about what to do withPUTTING EVERYTHING IN ORDER Finance charges are quoted as an interest credit score you’ll be assigned. The main criteria your money. Many are legitimate, but some canA budget or spending plan can help you keep rate, or annual percentage rate (APR), such as in calculating your credit score are your payment trip you up. But, if you know what to expect—track of your money and make it easier to spend 18% APR. This percentage is multiplied times the history and whether or not you pay on time. The whether it’s an APR for a credit card or loan, orwisely and to save. amount you owe. Sometimes, though, creditors total you owe, the length of your credit history, the particulars of an investment opportunity— The goal is to spend less than you earn every quote a monthly rate or even a weekly rate, which the amount of new credit you have, and the types you’ll be better able to avoid the people tryingmonth. So tracking where your money goes can can make what you’re being charged seem more of credit you use also matter. to separate you from your you where you may be able to cut back. reasonable. But 3% monthly is 36% a year, or $36 For a small fee, you can learn yourEven small changes in your spending habits, such of every $100 you borrow. And 3% weekly is $156 score from any of the bureaus oras planning cash withdrawals to cut ATM fees, for every $100.can free up money to help reduce your debt and APRs vary, depending on who is lending you FUTUREincrease your savings. the money or the credit card you use. Your credit SUCCESS Next, make a list of your financial goals. history is also important. For example, if you’re E RANCThese are the important things that you don’t late with payments, you’ll not only owe an extrahave to pay for now, but will eventually. They INSU LTERcould include driving a new car, buying a home, SHEsending a child to college, or having enoughto enjoy your retirement. If you start plan-ning now, the more chance you’ll have BUDGET BARRACKSof being able to afford them later. HELP IS AVAILABLE Most military bases have budget or financial-planning counselors who can help you create a budget and a savings strategy that works for you and your family. CAUTION Avoid offers that promise your credit score for free. Accepting usually means you’re also enrolled CREDIT CREEK in a credit monitoring plan or some other service you’re paying for but don’t really need. 3 ©2008 by Lightbulb Press, Inc. All Rights Reserved.
  4. 4. S m art I N V E S T I N G S m art I N V E S T I N G Saving unexpected expenses, such as large medical SAVING TO INVEST bills, the loss of income if your spouse becomes You also need to save to meet your financial ill or disabled and can’t work, or a major repair goals. If they’re short-term, like buying a car Saving now means you’ll have money to spend when you need it. to your car or home. A common rule of thumb is this year, you can keep the money in a savings to keep the equivalent of three to six months’ account, money market account, or CD. If your worth of take-home pay in your emergency goals are longer-term, like a down payment on Saving helps you manage your money to unexpected expenses. One benefit account—and use it only for real emergencies. a home, funds for college education, or a secure meet short-term goals, so you can avoid going is that they generally offer higher retirement, you’ll probably want to invest some into debt. It also helps you to prepare for interest rates than savings of the money you save. Investments have more unexpected emergencies. accounts. potential to make your money grow over time They’re called cash equivalents Investor A than savings accounts do. TIME TO SAVE because they are highly liquid, starts at Most banks and credit unions offer savings which means you can easily accounts, where you earn interest, or a percent- convert them to cash with little AGE 20 age of your account balance, at a specific rate on or no loss in value. And, they’re low risk, which a regular schedule. means your money will be there when you need it. $351,428 You can compare local and online banks to Certificates of deposit (CDs) are time find a higher rate. Just be sure that the one deposits, which means you commit the money for you choose is insured by the Federal Deposit a specific term—typically Insurance Corporation (FDIC) if it’s a bank or ranging from six months Investor B the National Credit Union Share Insurance Fund to five years—before you starts at (NCUSIF) if it’s a credit union. The insurance can withdraw it or roll it protects deposits up to $250,000 in bank or into a new CD. Like other AGE 40 $118,589 credit union accounts. bank deposits, these Savings accounts make it easy to deposit CDs are FDIC—or $ and withdraw your money either in person or NCUSIF—insured. by electronic transfer to your checking account. Treasury bills are Bank money market accounts usually earn government debt securities available in 4-, 13-, Total Total higher interest than regular savings accounts 26-, or 52-week terms. You buy them at a discount invested invested and may offer check writing and cash transfer privileges as well. However, you may be limited to their full price of $100, and receive interest plus purchase price $48,000 $48,000 to writing no more than three checks a month. back at maturity. The over 40 years over 20 years There’s one caution with both types of easiest way to buy T-bills accounts, though. You may be charged a service is directly from the fee or forfeit interest if your account balance government through a COMPOUNDING Over time, this difference really adds up. Say falls below the bank’s minimum. So be sure to TreasuryDirect account The earlier you get started saving, the better Investor A begins investing at age 20, contributing check your bank’s rules. you set up online at off you’ll be. This is because of a phenomenon $100 each month to a tax-deferred account earn- known as compounding. Compounding occurs ing an average annual return of 8%. Investor B, CASH EQUIVALENT INVESTMENTS They aren’t insured, but since they’re backed when your investment earnings are added to on the other hand, doesn’t start investing until Some investments, known as cash equivalents, by the federal government, you can rest easy your investment principal, forming a larger base age 40, but contributes $200 each month to can be great ways to save for short-term or knowing your money is safe. upon which future earnings can grow. This helps a similar account that also earns an average any account to grow faster, though it’s some- annual return of 8%. By age 60, both investors CREATING AN SAFETY COUNTS BUT IT COSTS times hard to see on small amounts. But look will have contributed $48,000, but Investor EMERGENCY FUND In general, the safer an investment is, the less you for savings accounts that offer an annual A’s account will have grown to $351,428, while One important reason earn. Cash equivalents generally pay more than percentage yield (APY) that’s larger than the Investor B’s account will only have grown to to save is to create an savings accounts, but they usually pay less than unin- interest rate on the account. That’s evidence $118,589. That’s because Investor A was able to emergency fund that you sured investments, such as stocks and bonds. your earnings are compounding. take advantage of the effects of compounding set up specifically for for 20 additional years. 4 5©2008 by Lightbulb Press, Inc. All Rights Reserved.
  5. 5. S m art I N V E S T I N G S m art I N V E S T I N G Investing TERM LIMITS Short-term bonds have terms of a year or less. ASSET CLASSES Stocks, bonds, and cash are categories of invest- Intermediate-term bonds have terms up to ten years, ments, known as asset classes. In talking Investing can take your savings to new heights. and long-term bonds have terms longer than ten about how stocks have tended to behave over time, years—though few are longer than 30 years. for example, it’s the entire asset class that’s being Saving is a great way to make sure you have discussed, not any one stock in particular. A mutual money when you need it most. But, over the fund is an investment product that invests in one or long term, the interest you earn probably more asset classes, and is not an asset class itself. won’t beat the rate of inflation, which EXCHANGE TRADED FUNDS BONDS is the continual rise in the price of An exchange traded fund (ETF) resembles stocks goods and services. That’s what makes in some ways and mutual funds in others. You buy investing an opportunity that you shares in a fund that is invested in a basket of shouldn’t pass up. When you invest, you buy things securities, often those tracked by a particular index. You are a lender of value that have the potential to mutual funds increase your principal, or the original amount you invested, by providing a return, or gain, higher than the rate of inflation. This helps you meet your financial goals. STOCKS You own shares in a fund that invests Remember, though, that investment returns aren’t guaranteed and your account You own part of a company could lose value, especially in the short term. Index funds are passively managed, which ACTIVE OR PASSIVE means that the fund’s investments change only when the In an actively managed mutual fund, the securities in the underlying index change. As a result, index manager buys and sells securities to try to achieve the funds generally have lower fees than actively managed BASIC INVESTMENT PRODUCTS or Invest fund’s objective. The manager also wants to do better funds. The goal of an index fund is to achieve the same than other similar funds. return as the specific index it’s linked to. You invest by purchasing financial products. The basic types include stocks, bonds, and the mutual funds that invest in them. STOCKS BONDS US SAVINGS BONDS MUTUAL FUNDS When you buy stock, you buy partial ownership When you buy a bond, you’re making a loan to The federal government also issues US savings A mutual fund owns a group of individual invest- in a company. If the company does well, you may an issuer, which could be the US government, a bonds. They’re like most other bonds because ments, usually stocks or bonds or both, which are make money by receiving a portion of its profits, government agency, a state or city, or a corpora- they pay regular interest and can be redeemed chosen to help meet the fund’s objectives, or known as a dividend. If the price goes up, you tion. The borrower promises to pay your money for cash at maturity. But unlike most other bonds, goals. If the fund’s objective is long-term growth, may want to sell your shares in the secondary back when the bond reaches maturity at the they’re nonnegotiable, which means you can’t it’s likely to be invested in stocks. If it’s current market for more than you paid for them and end of its term. sell them to another investor or trade them in a income, the fund is likely to be invested in bonds. reinvest your profit. Or, you may hold onto them, In exchange for letting the issuer borrow secondary market. When you buy shares in a fund, you are which can increase your net worth. your money, you typically receive regular interest There are two kinds: Series I and Series EE. investing indirectly in those securities, which But, if the company doesn’t do well or the payments until the bond reaches maturity. That’s The interest on Series I bonds is adjusted for are called the fund’s underlying investments. stock market drops, and you sell when the price why these debt securities are also known as inflation, while Series EE bonds pay interest at a It’s easier and less expensive than buying is down, you could lose some of your original fixed-income investments. fixed rate, and are guaranteed to double in value all the securities on your own. Professional investment. You could also lose money if the You may hold a bond to maturity or sell in 20 years. Both pay interest for up to 30 years. managers run the funds, which means you don’t company issuing the stock goes out of business. during its term. Bond prices move up and down But, if you sell before the bond reaches maturity, have to worry about when or what to buy and sell. based on interest rates and the credit rating you may forfeit some interest, depending on how But, there are fees for owning funds that reduce that’s assigned to them. long you’ve held the bond. your return. 6 7©2008 by Lightbulb Press, Inc. All Rights Reserved.
  6. 6. S m art I N V E S T I N G S m art I N V E S T I N G Balancing Risk and Return a broad market index fall 20% or more from the a valley of losses and back to another high is known as a full market cycle. most recent peak. When prices rise for a prolonged period, it’sThere is always the possibility that the Investing has lots of return potential, but risk comes with the territory. called a bull market. Bull markets don’t lastmarket as a whole, or a particular asset class, will experience a gain or a decline. With stocks, for a specific amount of time, and prices don’t bear markets typically occur when investors sell increase at the same rate or to the same extent Successful investing requires taking some risk. A N0-GO OPTION from one bull market to the next. Bear markets, their shares because they anticipate worsening But that doesn’t mean you should keep your dis- If you’re offered a guaranteed, or no-risk, economic conditions. on the other hand, occur when prices reflected in tance. Smart investing can make the difference investment that isn’t an insured bank deposit, But, each security poses its own risk. If a between achieving your financial goals and it’s not legitimate. Investment results can never competitor releases a successful new product having to postpone or abandon them. be guaranteed. or a company’s management makes a bad If you’re wondering what risk means in this decision, that can trigger a drop in context, it’s basically one of two things: losing the stock’s price. So, while stocks money or losing buying power. TAKING RISKS as a whole might be doing well, an Even though risk is always a factor, levels vary. individual security could be losing MAKING MONEY In general, the more potential an investment MARKE value. On the brighter side, some When you invest, you’re interested in total T has to provide a high return, the more risks the stocks may provide strong returns return. This is the amount your principal investment poses. RISK RETURN even when stock prices overall increases or decreases But, that doesn’t mean you should buy are flat or falling. in value, plus any only the lowest-risk investments. In fact, earnings you receive. INVESTM Say you spend one of the biggest risks you can take is not ENT Change taking enough risk. Investing only in the RISK $1,000 on shares of in value safest products, such as CDs, is likely to a stock and receive mean your return won’t be high enough $50 in dividends. If +Earnings to outpace inflation over the long term, you sell your shares = TOTAL RETURN leaving you with less than you need or for $1,200, your return is $250 ($200 + $50 = expected to have. MARKET CYCLE For example, if inflation is 3% and $250). But, if the stock you earn an annualized 8.3% return on a loses value and you have to sell for $800, you have stock investment, your real return, or your a negative return of $150 ($50 – $200 = –$150). When you want to compare how one invest- return after inflation, is 5.3%. But if you’re ST ment is performing compared to another, you earning 2.5% in a money market account, your AR look at percent return. You find this number real return is a negative 0.5%. T UNDERSTANDING The key is seeking a balance between risk VOLATILITY by dividing your total return by the amount you and potential return that suits your goals and The more volatile an investment is, the invested. In this case, it’s 25% ($250 ÷ $1,000 = your tolerance for risk. For example, you might more often and quickly its value changes. 0.250). Next consider annualized return. If you emphasize the safety of savings for short-term Stocks are generally more volatile than owned this stock for three years before selling, goals and buy stocks or stock mutual funds for bonds. And, small-company stocks are your annualized return would be 8.3%. To find longer-term goals. usually more volatile than large-company this number, divide your percent return by the stocks. That reflects the fact that small appropriate number of years (0.250 ÷ 3 = 0.083). GOING TO MARKET companies often have growth spurts but The investment markets aren’t predictable, and may also be more vulnerable to economic KEEPING TRACK you can never be sure what will happen a year downturns than big companies. While there’s no reason to check the return on from now—or even tomorrow. That may make But greater volatility also means the your investments every day or every week, it’s you uneasy. But, time has shown that they tend to potential for higher returns. Bonds are less smart to keep track of how they’re doing overall. move up and down in a recurring pattern. Moving volatile than stocks, but their returns have If one or two consistently provide weaker returns from a peak of strong performance down through been lower than stock returns over time. than their peers, you may want to replace them. 8 9©2008 by Lightbulb Press, Inc. All Rights Reserved.
  7. 7. S m art I N V E S T I N G S m art I N V E S T I N G The Rules of Engagement DIVERSIFICATION Diversification is also essential. This strategy AS TIMES CHANGE involves selecting a variety of individual invest- As you grow older, or meet some goals and develop others, you may need to reallocate, or modify The key to a successful investment portfolio is the way you ments, mutual funds, or exchange traded funds your asset allocation, to better suit your situation. (ETFs) within each asset class. The reason is, put it together. as you’ll discover, that some investments are For instance, as you near retirement, you may successful and others, which seemed to have move out of higher-risk stock investments into more The amount you invest and the investments you protect your principal and still have the potential similar potential, are not—often for reasons no stable options, like bonds, to protect the wealth select are key factors in determining whether for gains throughout the market cycle. one could predict. you’ve accumulated. you’re able to meet your financial goals in the If you invest in a variety of stocks or bonds, timeframe you’ve set. It’s important to choose PUTTING STRATEGY INTO PRACTICE you’ll help protect your portfolio from losses from You do want to be careful, though, that if you securities that you think will increase in value There isn’t a right or wrong way to allocate your any one investment, expand the potential for a buy several mutual funds to diversify your portfo- or provide income. But, it’s just as important to assets. But the way you do it should always be strong overall return, and spread out your risk. lio that each is invested differently. Owning two select investments that will interact well with based on the amount of time you have to invest funds that invest in many of the same securities the others you already own. to meet your goals and how much risk you can GO SOLO OR IN A POOL? won’t help you get the diversity you seek. Putting a portfolio together doesn’t mean tolerate without selling in a panic. Mutual funds or ETFs can simplify the diver- randomly buying a stock here and a mutual fund If you’re investing for the long term, you sification process for all investors, and new DOLLAR COST AVERAGING there. If you don’t follow a strategy, you could generally have the time to take more risk. So investors in particular. That’s because each fund Dollar cost averaging is another strategy that end up taking on more—or less—risk than you you might select a more aggressive allocation is already diversified since it holds a number of can help you build your investment account. To intend. The good news is that there are tested and concentrate your portfolio in stocks or stock individual investments chosen from a particular use this approach, you add a fixed amount of strategies you can use as you make your choices. mutual funds. segment of the investment market. money on a regular schedule to a mutual fund If you’re closer to reaching a financial mile- In choosing these pooled investments, though, or dividend reinvestment plan (DRIP). ASSET ALLOCATION stone, or if several people depend on you finan- you should keep in mind that funds with narrowly This means that you’ll be buying more shares Asset allocation, which means spreading your cially, you might prefer a more conservative focused objectives, such as a sector fund that when prices are low, and fewer shares when investment dollars across the major asset classes, allocation. This might mean putting an emphasis invests in one slice of the economy, are less prices are high. If you invest on a regular basis, is a strategy that’s essential to effective investing. on government bonds and cash equivalent diversified than funds that invest in a broader as the price goes up and down, the average price It works because not all investments react in the investments to help preserve capital. cross section. You can research how a fund you pay will be lower than the average price per same way to changing market conditions. Many investors use a moderate allocation, invests by checking the fact sheet provided on share. But it won’t work if you stop buying when Stocks and bonds, for instance, are striving to achieve a balance between what the fund company’s prices drop. negatively correlated. When stocks are would be too much risk or too much safety website or Dollar cost averaging will help you build flourishing, bonds typically falter, and when to suit their goals. reading its your long-term portfolio, but it won’t guarantee stocks are flagging, bonds typically do well. prospectus. you’ll make a profit, or that your investments If you allocate a percentage of your portfolio won’t lose value. to each of the major asset classes, you can help BONDS STOCKS MUTUAL FUNDS ALIKE OR DIFFERENT? ASSET Correlation describes the extent to which ALLOCATION different investments respond to changing market conditions. Positively correlated assets tend to react similarly, and negatively correlated assets usually move in opposite directions. INFLATION INTEREST RATE DIVERSIFICATION DOLLAR COST AVERAGING 10 11©2008 by Lightbulb Press, Inc. All Rights Reserved.
  8. 8. S m art I N V E S T I N G S m art I N V E S T I N G Retirement Planning TAKING DISTRIBUTIONS Since you’re investing for retirement, you usually TAX-EXEMPT CONTRIBUTIONS can’t take money out of your TSP account before If you’re in a combat zone or qualified hazardous duty area, some or all of your pay is tax exempt Make saving for retirement standard operating procedure. you’re retired and turn 59½, though you may depending upon your rank. Any contributions you qualify to begin earlier. When you leave the service or retire you make to your TSP from combat pay are also tax Retirement may be the last thing on your mind. exempt, though any earnings on these contribu- may keep your money in the TSP to continue to But it’s the most important kind of investing you tions grow tax deferred. grow your retirement savings. Or you can transfer can do for long-term financial security. The earlier the assets to another retirement plan, such as you start, the better chance you’ll have of meeting an individual retirement account (IRA), or that goal, thanks to a double boost provided by to an employer sponsored plan, such as a INVESTING WITH TAX ADVANTAGES tax deferral and compounding. 401(k), if you work for a private employer Because you earn income, you can also open whose plan accepts transfers. an individual retirement account (IRA), even THRIFT SAVINGS PLAN You could also take the balance in if you’re contributing to the TSP. You select the The government’s retirement plan, the Thrift cash, but that’s almost never a good idea custodian for your account—a bank, credit union, Savings Plan (TSP), makes it easy as well as since it uses up your retirement savings mutual fund company, or other financial services smart to save for retirement. You can enroll and you pay taxes on the entire amount firm—and choose the investments yourself or and start contributing as soon as you enlist. you take out. with the help of a financial professional. You can contribute from 1% to 100% of your But, if you do take money out, the There are two types of IRAs, traditional basic pay each pay period—up to the annual HEART Act of 2008 lets active-duty and Roth, both with tax advantages. Taxes are limit set by Congress. The limit goes up over troops and mobilized National Guard and deferred on any earnings that accumulate in a time, though not necessarily every year. If you Reserve members withdraw without any traditional IRA, and earnings are tax free in a contribute basic pay, you may also contribute additional penalty. You can put back in Roth IRA if you follow the withdrawal rules. You from 1% to 100% of any incentive, special, or what you took out up to two years after may also qualify to deduct your IRA contribution bonus pay you receive—as long as you stay you leave active duty. based on your adjusted gross income (AGI). within the contribution limits. There are restrictions with both types, so it’s If you’re 50 or older, you’re entitled to make important to learn the details before you get an additional catch-up contribution each year. started. For example, Congress sets an annual contribution limit plus there’s an additional CHOOSING INVESTMENTS account to grow faster. This is because of two annual catch-up contribution if you’re 50 or older. The TSP is a defined contribution plan, which major benefits of tax-deferred investing: And when you turn 70½, you will have to take means that your retirement income will depend • Your contributions are withheld before your t men minimum required distributions (MRDs) on how much you’ve contributed to your account, ire income is reported to the IRS, which lowers from your traditional IRA and your TSP. Ret n the investments you choose, and what those the current income tax you owe. investments earn. You can allocate your contributions among • T axes on your contributions and any earnings Pla THE ANNUITY ALTERNATIVE in the account are postponed until you begin If you’ve maxed out on contributions to your TSP the five index mutual funds—three stock funds taking money out. and IRA but want to save even more for retire- and two bond funds—available through the ment, you might consider an annuity. Annuities ) 01(k plan, or choose a lifecycle fund that gradually are insurance company products designed to changes the allocation among stocks and bonds As a member of the armed forces, you’re auto- provide income after you retire. Earnings typically for you as you get closer to retirement age. matically enrolled in the Uniformed Services grow tax deferred. The drawbacks are that they Retirement System. This defined benefit may have hefty commissions and other fees plus TAX ADVANTAGES plan, or pension, pays you retirement income substantial penalties for early withdrawal. Unless you’re contributing combat zone pay, based on your years of service and your rank at the contributions you make and the earnings retirement. But you usually must serve at least you accumulate in your TSP are tax deferred, 20 years of active duty to be eligible. For more information about Thrift Savings Plans and which helps you save money and the value of your the amount of the annual cap, visit 12 13©2008 by Lightbulb Press, Inc. All Rights Reserved.
  9. 9. S m art I N V E S T I N G S m art I N V E S T I N G Where You Invest Brokers: All brokers must be registered in the states where they work and with the Financial REPORT PROBLEMS Industry Regulatory Authority (FINRA). To see If you suspect a problem with your broker, investment adviser, or insurance agent, contact Investing safely starts by finding the right place to open an account. information on a particular broker, you can review that person’s supervisor. If you’re not satisfied with records held in a national database called the Central Registration Depository, or CRD. The the response, immediately report the situation to When you invest, you buy and sell, or trade, If you want to invest just in mutual funds, the state securities regulator in the state where the CRD contains information such as licensing status securities. Usually you trade through an inter- you may open an account with a mutual fund transaction occurred. The name of the office will and disciplinary history. To obtain a CRD form, mediary, who places your order in exchange for a investment company and purchase shares in vary from state to state. There’s a list at the back call your state securities bureau or visit FINRA commission or fee. The intermediary you choose the fund directly. Or you may buy funds through of the guide. at and click on BrokerCheck. You will depend on the investments you want to make your broker or adviser. And if you want to buy only can find information for your state by contacting and whether you want financial advice as well. insurance products, like annuities, you can work the North American Securities Administrators You can buy almost any kind of investment by with an insurance agent. Insurance agents Association at, or 202-737-0900. against the adviser—but not current complaints, setting up an account at a securities brokerage must be licensed by each state in which they sell if there are any. The other part contains a firm. Brokerage firms, also called broker- products, and most are paid with commissions. Investment advisers: A firm that is paid for summary of the adviser’s background and fees. dealers, must be licensed, and the brokers, also providing investment advice must register as known as agents or registered representatives, DOING YOUR HOMEWORK an investment adviser, either with the state or Insurance agents: Insurance agents are who work there must be registered. Brokers While most brokers, investment advisers, finan- Securities and Exchange Commission (SEC). licensed by the state or states in which they sell receive commissions on what they sell. Some cial planners, and insurance agents are honest, Registered investment advisers (RIAs) are their products. Independent insurance agents brokerage firms operate only online, but they some may sell fraudulent or inappropriate required to file a document called Form ADV, sell products for at least two different insurance must still be licensed, and you still pay for investments or try to pressure you into acting which they will provide if you request it. To obtain companies, while exclusive insurance agents their services. Many banks have broker-dealer quickly. Unregistered brokers and investment background information on an investment adviser, represent only one company. Most insurance representatives on the premises. These reps are advisers might appear to be legitimate and may contact your state securities regulator or the SEC agents are paid with commissions on the not bank employees and the products they sell even sell genuine products, but they operate at One part of products they sell. are not FDIC insured. without being properly licensed, which is illegal. Form ADV lists any disciplinary actions An investment adviser provides advice, If you follow some basic rules, you can help helping you develop a plan for meeting your protect yourself by checking an individual’s or financial needs and goals. Like securities broker- firm’s credentials before you agree to work with dealers, investment advisers and investment him or her. adviser representatives must be registered, There are several ways to check investment though the rules governing their responsibilities professionals’ backgrounds. Start by asking for differ. Most investment advisers are paid a fee, their office phone number and address and not commissions. Some don’t trade investment confirm they actually have a place of business. products for you, but simply provide advice—so Then check that they’re properly licensed you need to set up a brokerage account some- and registered. where else to actually buy and sell investments. Getting Started Never invested before? It can be intimidating, but here’s how to start: Step 1: Identify Step 2: Find a financial adviser or broker Step 3: Write a check for your first Step 4: Track your goal for investing to help narrow your choice to a particular investment to your new brokerage, bank, your investment and one type of investment. Go with someone you are referred mutual fund, or other account, not to an by reading the investment that may to rather than finding someone through the individual. You can sometimes invest as information you help you reach it, phone book or ads. Talk to friends, coworkers, little as $50 or $100 with a direct deposit get in the mail and such as a mutual fund and family, or even your bank manager. Never account, but getting started may require a asking your adviser or stock. respond to strangers’ solicitations to invest. certain minimum, such as $1,000 or more. for updates. 14 15©2008 by Lightbulb Press, Inc. All Rights Reserved.
  10. 10. S m art I N V E S T I N G S m art I N V E S T I N G Avoiding Inappropriate Investments Callable certificates of deposit (CDs): Unlike most conventional CDs, which mature within six months to five years, callable CDs may not mature There’s outright fraud and there are inappropriate investments. for as long as 10 to 30 years. In that period, your Stay away from both. money may be inaccessible unless you pay a steep K penalty—an important fact that some dishonest It’s essential to avoid doing business with STOC salespeople conceal. Callable CDs may not be FDIC insured, so you should ask the salesperson dishonest salespeople selling fraudulent for written verification. investments and those who pressure you for Limited immediate decisions by insisting that an Highly Highly volatile investments: Investments like opportunity will evaporate. It’s equally impor- Liquidity Volatile options and futures contracts require constant tant, but it may be harder, to decide whether a Withdrawal monitoring to avoid potential losses. In fact, legitimate investment product is right for you. Restrictions even if you do monitor them closely, you could be “Callable” vulnerable to large losses. If you’re a new investor, NO FREE LUNCH Certificates or can’t check constantly on your accounts, these In some cases, the way in which investment OTC of derivative investments may not be appropriate products are sold may be a problem. Some Stocks for you. salespeople offer investment Deposit seminars—with lunch or dinner—at a hotel or other HOW TROUBLE FINDS YOU public facility, focusing on Investments with withdrawal restrictions: Deceptive salespeople may track you down in a financial or retirement Some investments may prevent you from with- variety of ways: planning. Others promote living wills. Some seminars drawing your money for a certain period of time or charge a steep fee for early withdrawal. You • Buying your information: Many scam artists will call you, email you, or mail you letters, can be educational and should always check up front to determine if all unsolicited, offering unrealistic promises of useful, but others are there is a withdrawal restriction, how long it guaranteed returns or no-risk investments. Some primarily high-pressure lasts, what the penalty would be, and who con artists buy names and addresses of people sales pitches. OTC stocks: Shares in companies that aren’t benefits from it. who subscribe to magazines to target potential If you attend this type listed on a major stock market like the New York There are some withdrawal restrictions new victims. of seminar, it’s unwise to Stock Exchange or the Nasdaq Stock Market are that serve an important purpose. These include buy anything there. And you called over-the-counter, or OTC, stocks. Some retirement savings plans, like individual retire- • Luring you in: Other scammers try to hook shouldn’t reveal detailed large international company stocks are traded ment accounts (IRAs), and education savings you in online investment chat rooms by raving personal or financial OTC. But many OTC stocks are small and trade programs, like 529 plans. These plans help you about a hot stock that sparks your curiosity. information, such as infrequently. Some issuing companies are not stay on track to meet a goal by restricting your Some place ads in newspapers often offering your Social Security registered with the SEC, which is legal but means ability to take money out without penalty before guaranteed returns on can’t-miss investments. number. If you want there’s limited information publicly available you reach that milestone. Even mainstream publications may carry to follow up on any of the about them. Both factors make these stocks these ads. Investments with limited liquidity: An ideas, contact the seminar leader later or, probably wiser, especially risky because you may not be able to sell if you want to or find out what you need to illiquid investment can’t be easily converted • Talking to you: You might meet a scam artist to cash. One example is a limited partnership, in person, because some go where they think work with your own broker or know to make an informed purchase. their targets may congregate. Never discuss your which pools people’s money to invest in real investment adviser. Penny stocks, a specific type of OTC stock, personal financial situation with a stranger, even estate or other ventures. Limited partnerships sell for less than $5 a share. Some penny stocks if he or she seems helpful or suggests you have are not publicly traded, so if you need your money, PROBLEMATIC may provide big returns over the long term, but friends or loyalties in common. If someone you you could have trouble finding someone to buy INVESTMENTS many turn out to be worthless. Penny stocks are don’t know offers you an investment, turn your portion of the partnership at the price you Certain types of investment products may be often falsely promoted to unsuspecting buyers, it down. want. In fact, selling may not be allowed even if legitimate, but not right for most investors, who are led to believe they are getting a bargain. you could find a buyer. including you. 16 17©2008 by Lightbulb Press, Inc. All Rights Reserved.