HOW TO INVEST FOR SAFETY: Money market funds are safe and pay interest in the shape of dividends. In the year 2011 rates of interest generally will likely still below in these funds and at the local bank as well. The advantage with money funds is that whenever rates increase in the future the interest you earn will automatically follow current trends. Invest money in these funds for security and flexibility. You may always move some of these funds to other funds at no charge if you are with among the best fund companies, to be named later. HOW TO INVEST TO EARN MORE INTEREST: Bond funds offer higher interest income or dividends at a moderate level of risk, GENERALLY.
Today’s low rates of interest make the risk here greater than usual. Unlike money funds where the stock price is always pegged at $1, the price or value of bond fund units WILL FLUCTUATE. When rates of interest increase, their price will fall. There are two ways to deal with this risk in the year 2011 and beyond.
First, ensure you continue to invest the same dollar amount each month. This way whenever you invest money each month you’ll automatically buy more shares when the share price becomes cheaper and fewer at high prices. This is called dollar cost averaging, which is a powerful tool for long-term investors. Second of all, pick intermediate-term bond funds or short-term funds vs. Long-term ones. The shorter the term of a bond funds the lower the risk. HOW TO INVEST FOR MORE PROFIT POTENTIAL: Equity funds invest in stocks and offer the prospect of higher returns over the long term as well as more risk.
Expect the fund share price to fluctuate as the stock market does whenever you invest money here. There are two ways to rein in risk here as well. Go with DIVERSIFIED EQUITY INCOME funds that invest in large companies that pay dividends consistently. They’re less volatile than growth funds that pay very little in dividends. Second of all, use dollar cost averaging to lower your average cost per share, just like you are doing in your bond fund. HOW TO INVEST IN ALL THREE OF THE ABOVE: Make certain that all your dividends along with other income earned are automatically reinvested to purchase more shares in the funds, and not sent to you. This is normal procedure in mutual funds for long-term investors and puts dollar cost averaging to work for you each time you earn income in a fund. With the best fund companies you can invest in a single account if single or married, a joint account with your spouse, and/or an IRA if you want tax benefits and qualify.