Are Bond Mutual Funds a Safer Bet?
When investing you have to take into account risk. Risk is the possibility that you will incur loss. When it comes to investing, if you invest in a high risk security, it is very likely that you will lose money. When investing, you want to have the lowest possible risk with the highest possible return. You want to make the most money without having to worry about losing any money.
Different types of investments carry varying degrees of risk. Let’s say you have $10,000 that you want to loan for investing and you have 2 friends that need money to start a new business. The first friend has borrowed and repaid money to you many times before. You have trust with them that they will pay you back.
Your other friend also needs $10,000 for this new idea they have. They are really excited because they feel they can earn a lot of money. Unfortunately, they almost never pay you back when they borrow yours or anyone else’s money. You don’t feel very well giving your money to them.
The first friend will most likely pay you back, but when they do, their only going to pay back with 8% interest. The second friend has a much better idea that you think will be a hit and he promises to give you half of the profits.
You are taking on greater risk with the second friend, but you’ll make a lot more money with them. The first friend won’t make you nearly as much money, but you will probably get your money. Is the money you might make worth the risk?
The same goes with stocks and bonds. Stocks are more risky, but you could earn a lot more. Bonds are less likely to earn more money, but you’ll at least get back what you put in. The same goes with stock and bond mutual funds.
If you are close to retirement, you should focus more of your money in bond funds. This will ensure that you don’t lose the money you will need during retirement. Bonds are less risky and better for those closer to retiring or retired.
While your young, invest more in stocks. As you get older you can invest more and more in conservative bonds. This method will allow you to make the most without worrying about losing it.
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