Читать книгу Personal Finance After 50 For Dummies - Eric Tyson - Страница 96

Investors are often bewildered at all the investment options from which they can choose. But we can simplify things for you. All the investments you may choose from fall under one of the following two categories:

 Lending investments: A lending investment, as the name suggests, is an investment where you lend your money, typically to an organization. For example, when you place your money in a bank account, such as a savings account, you’re essentially lending your money to a bank for an agreed-upon interest rate.Bonds, which are IOUs issued by companies, are another common lending investment. When you buy a newly issued ten-year bond from Verizon at 5 percent, for example, you’re lending your money to Verizon for ten years in exchange for 5 percent interest per year. If things go according to plan, you’ll get your 5 percent interest annually, and you’ll get your principal (the original investment) back when the bond matures in a decade.

 Ownership investments: With ownership investments, by contrast, you own a piece of an asset that has the ability to produce profits or earnings. Stocks, which are shares of ownership in a company, and real estate are ownership investments.In a capitalistic economy, individual investors can build wealth faster by being owners. For example, say Verizon doubles in size and profits over the next seven years. As one of their bondholders, you won’t share in the growth, although it will help ensure they can make their bond interest payments and final repayment when the bond matures. As a stockholder, however, you should benefit from a stock price driven higher by greater profits. Ownership investments can also produce income, such as the dividends paid on some stocks or the rental income produced when you rent out real estate.

Over the past two centuries, U.S. stock market investors (owners) have earned an average of 9 percent per year, whereas bond investors (lenders) have earned about 5 percent per year.

As we mention in the earlier section “Understanding risk,” risk and return generally go hand in hand. If you seek safe investments — investments with low volatility and low likelihood of the value of the investment declining — you’ll usually have to settle for lending investments with relatively low returns. If you seek higher returns well ahead of the rate of inflation, on the other hand, you must use investments that provide an ownership stake and could either rise or fall more significantly in value, especially in the short term.