Making Investment Choices

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“I’m saving money for retirement. What kinds of investments should I choose?”

Now that many employees have retirement plans in which they must choose their own investments, this is a common question, according to Karen Chan, University of Illinois Extension consumer and family economics educator. If you have a 401(k) or 403(b) plan at work, an IRA or other self-managed retirement plans, you will have to make this decision.

One of the basic choices is between stocks and bonds. It may help to think of those as ownership investments and loanership investments.

With loanership investments, you loan someone your money and they pay you interest. When you put money in the bank, you are loaning them the use of your money. If you buy US Savings Bonds, you are loaning money to the US government. If you own a bond issued by a corporation, you loaned that company money.

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Stocks and real estate are two major examples of ownership investments, where you own a part of a company (shares of stock) or a piece of property. You will benefit if the value of the company, or the property, increases. You can sell it at a profit. With stocks, you may have also received dividends while you owned the stock.

To decide where to invest your retirement money, first determine how long your money will be invested, Chan suggested. Money that will be invested for 10 years or more is considered a long-term investment; five years or less is considered short term.

Purchasing power risk is the type of risk that you most need to control or avoid for long-term investments. “Inflation may seem minor at 3 or 4 percent per year, but over time it eats away dramatically at the buying power of the money you’re saving,” Chan said.

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If your money is in interest-bearing (loanership) investments, you may be losing ground after inflation and taxes are considered. In contrast, ownership investments are unpredictable in the short term, but over longer periods of time they give you a good probability of increasing in value faster than inflation.

Therefore, the further you are from retirement, the greater the proportion of your retirement funds that should be invested in stocks. To learn more about loanership and ownership investments visit University of Illinois’ website, Plan Well, Retire Well: Your how-to guide (www.RetireWell.uiuc.edu). The Plan Well, Retire Well website is funded in part by a grant from the Investor Protection Trust, www.investorprotection.org.

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“Both ownership and loanership investments have risks,” says Karen Chan. “However, you can learn how to manage these risks. The Plan Well, Retire Well website can help you do this.”

Source: Karen Chan, Consumer and Family Economics Extension Educator, Countryside Center, University of Illinois, (708) 352-0109, [email protected].
Spanish language contact: German Cutz, Extension Specialist, Spanish Language Programming, Northeast Region Office, University of Illinois, (708) 481-0111, [email protected].

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