Some investments pay out earnings on a regular (quarterly, monthly, or annual) basis, while others pay out earnings at the end of the investment period or may have age requirements for when you can withdraw your money without a penalty. Make sure your investment income stream matches your investment timeline.
You should also consider the tax ramifications. If you are saving for retirement or for education, consider investments that offer incentives for saving for a particular purpose. Your contributions for some investments are tax deductible, but the earnings are not taxed (e.g. Roth IRA); your contributions to other investments may not be taxed, but the earnings are taxed (e.g. traditional IRA).
You don’t have to put all of your money in one investment. Consider diversifying your investment portfolio by placing your money in several investment vehicles. This can protect you from risk; while one of your investments may be performing poorly, another one of your investments can make up for those losses.
|Type of Investment||What is it?||Risk level|
|Traditional IRA||Traditional IRA is a personal savings plan that gives tax advantages for savings for retirement. Investments may include variety of securities. Contributions may be tax-deductible; earnings are not taxed until distributed.||Risk levels vary according to the holdings in the IRA|
|Roth IRA||A personal savings plan where earnings that remain in the account are not taxed. Investments may include a variety of securities. Contributions are not tax-deductible.||Risk levels vary according to the holding in the IRA|
|Money Market Funds||Mutual funds that invest in short-term bonds. Usually pays better interest rates than a savings account but not as much as a certificate of deposit (CD).||Low risk.|
|Bonds and Bond Funds||Also known as fixed-income securities because the income they pay is fixed when the bond is sold. Bonds and bond funds invest in corporate or government debt obligations.||Low risk.|
|Index Funds||Invest in a particular market index. An index fund is passively managed and simply mirrors the performance of the designated stock or bond index.||Risk level depends on which index the fund uses. A bond index fund involves a lower risk level than an index fund of emerging markets overseas.|
|Stocks||Stocks represent a share of a company As the company’s value rises or falls, so does the value of the stock.||Medium to high risk.|
|Mutual funds||Invest in a variety of securities, which may include stocks, bonds, and/or money market securities. Costs and objectives vary.||Risk levels vary according to the holdings in the mutual fund.|