- 1). Fund an Individual Retirement Account (IRA) each year. IRAs create an attractive investment of capital in two ways. Pre-tax money funds the retirement plan. Then, investments in the IRA account grow tax-deferred until retirement. Without taxation, funds grow faster in the retirement account. For example, BB&T Bank compares and contrasts and Individual Retirement Account with a savings account. Both accounts receive an investment of $5,000 per year. Both accounts earn 6 percent annually. The savings account interest is taxed at 28 percent, but the IRA funds grow without the impact of taxes. At year two, the IRA account has $10,300 while the savings account has $10,216. The dramatic impact of tax-deferred compounding is apparent at year 30. The IRA has more than $395,000 and the savings account has almost $100,000 less.
- 2). Invest capital in the public markets as an individual investor. According to author David M. Darst in "Mastering the Art of Asset Allocation" in 2010, many different types of investments occur in the three major asset classes of money-market instruments, bonds and stocks.
Money-market instruments, such as Treasury bills and commercial paper, are short-term loans of the U.S. government and corporations. Many investors purchase money-market mutual funds to ensure diversification of these short-term instruments. Diversification spreads risk across a number of securities.
Bonds represent the loans to governments and corporations from investor-lenders. Interest rates on all forms of loans traded in the public market reflect historically low levels. For example, a 10-year U.S. Treasury bond yields about 3 percent at year-end 2010. - 3). Seek higher interest rates with more risk. At least two kinds of risk exist for the bondholder. Interest rates may rise over time. Bond prices and interest rates have an inverse relationship. When interest rates rise, bond prices decline. Bondholders also bear credit risk. The credit quality of corporate bonds may decline over time. In 2010, only four corporate bond issues earned a AAA, which is the highest investment grade rating, by Standard & Poor's and Moody's. Corporate bond issuers' credit may rise and fall as economic and business conditions change. For these reasons, investors purchase many individual bond issues or a bond mutual fund to achieve portfolio diversification.
Standish Mellon Investors reports that the U.S. bond markets have returned an average 7.09 percent on investment per year between 1990 and 2009. - 4). Direct capital to stock investments with the ability to assume greater risk. Stock investments represent fractional ownership in a public company. Shares rise and fall according to supply and demand factors. Conservative stock investors seek companies with a long-term track record of performance. Price stability and reliability factor into the investor's evaluation prior to purchase. Stock dividends may be desirable to the investor.
Other stock investors seek capital appreciation potential only. These investors evaluate companies based on fundamental and technical research. Standish Mellon Investors reports that U.S. stocks have returned an average 7.99 percent return on capital from 1990 to 2009.
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