Stocks, bonds, bank accounts or IRAs? How do you choose?
First off, the main consideration in any long-term investing decision is the rate of return expected from it. At times though, investing in short-term investment can enhance your wealth even if the returns are not as high as you want them to be. You can select from among these common short-term savings vehicles:
Short-term savings vehicles
Bank savings account: The most resorted to savings medium availed of by people, which provides small returns but better than keeping your money at home where it could be stolen or spent easily.
Money market funds: These funds are a type of special mutual funds that are invested in exceptionally short-term bonds. Money market fund shares are always valued at $1 whereas most mutual funds can have uncontrolled prices. Although they pay higher returns compared to bank savings accounts, they provide lower returns than certificates of deposit.
Certificate of deposit (CD): You can also open a CD, a special account made at a bank or another financial body which has an interest rate often at par with short- or intermediate-term bonds, depending on the CD’s deposit duration. The depositor receives regular returns on interest until the account matures, at which time the original amount deposited is returned together with accumulated interests incurred. Oftentimes, certificates of deposit through banks are insured to a maximum of $100,000.
Our company is partial to stocks as investment vehicles over the rest of the long-term choices since stocks have statistically provided the best rate of return in an investment. The most common long-term investing vehicles are as follows:
Long-term investing vehicles
Bonds: There are various forms of bonds. Also known as "fixed-income" securities, bonds generate a “fixed” or set income value each year when it is sold. They are very similar to CDs as investments options although they are issued by the government or corporations and not by banks.
Stocks: Stocks allow an individual to own a portion of a company or business. A single stock share represents an investor’s proportional stake or share of ownership in a business. As the business grows, the worth of an investor’s share in it also increases. Otherwise, the worth decreases.
Mutual funds: Mutual funds are vehicles which allow investors to combine their money to buy bonds, stocks, or any vehicle the fund manager considers viable. In short, you turn over the control of your money to a professional who now has the final say as to the performance of your investment. In most cases, these "professionals" play with your money by underperforming the market indexes to their own benefit.
Several special plans are intended to build retirement savings; and many of these plans permit an individual to transfer money directly from his or her paycheck prior to taxes. In support for this plan, companies sometimes match the amount transferred, or even a small portion of that amount, as their goodwill contribution to their employees’ future. In some countries, the company share is required by law at specific amounts or percentage of salaries. In some cases, these plans can provide an “advance” out of the plan to purchase a house or pay for college, at no interest. In cases where an “advance” is not allowed, an individual can take out a loan from the account, or take a low-interest secured loan using the retirement savings as security. The rates of return on these plans vary according to the type of vehicle invested in, whether bonds, stocks, CDs, mutual funds or any mix.
Individual retirement account (IRA): This type of plan lets you invest some money into a tax-deferred retirement fund – which means you will not be taxed unless withdrawals are made or before the fund matures. Regular income-tax rates apply once money is withdrawn, which are higher than capital-gains tax rates. All IRAs are considered as specialized accounts and not as investments, allowing the account holder to invest freely in any manner. Some or all of your IRA payments may be considered tax-deductible, if the holder satisfies certain requirements.
Roth IRA: Unlike the previous IRA plan, this type of retirement account requires no tax payments up-front on contribution. Rather, it provides full exclusion from federal taxes when cash is withdrawn to purchase a first home or pay for retirement. Likewise, a Roth IRA can also be utilized for other specific needs, for instances, unreimbursed medical expenses and education minus any penalty. Nevertheless, earnings which are withdrawn will be taxed as income if your age is below 59 ½ years. Only qualified taxpayers can avail of a Roth IRA; that is, if you join corporate retirement plans and are disqualified from deductible payments to the conventional IRA.
401(k): Employers provide this retirement savings vehicle, whose name is taken from the section of the Internal Revenue Code which allows it. This plan has the tax advantages and the potential benefit of corporate matching (as mentioned above), making the 401(k) a potential choice for many people.
403(b): This is the nonprofit version of a 401(k) plan. Local and state governments also provide a 457 plan.
Keogh: A specialized form of IRA that serves simultaneously as a pension plan for a self-employed individual, who has the capacity to pay substantially higher contributions permitted for an IRA.
Simplified Employee Pension (SEP) plan: This is a special type of Keogh-individual retirement plan designed to allow small businesses to provide retirement plans (for their employees) that are slightly easier to manage compared to conventional pension plans. Either the employer or the employees can participate in a SEP.
Investing in stocks
Stocks deserve a closer look as they have been known in the past to offer higher returns compared to bonds and other vehicles. As mentioned, the investor becomes a part-owner of a company. Since it was started by Dutch mutual stock corporations in the 16th century, the present-day stock market allows business-owners to raise capital to run their enterprises with the money provided by investors. This scheme makes the investor a stakeholder or a virtual co-owner of the business itself. As a token of that ownership, the stock certificate is given to the investor to serve as specialized financial "security," or financial instrument attesting to or securing an investor’s claim on the assets and income of a business concern.
The most common type of stock is, as expected, the common stock. The common stock provides an ideal vehicle for most individuals, since anyone can participate – whether you are young, old, discriminating or easy-go-lucky. There is practically no restriction imposed against anyone who wants to buy a common stock. Nevertheless, the common stock does not merely consist of a document but an actual part-ownership of an existing business operated by real people. Through buying stocks, you participate in a very satisfying process of producing wealth which is unmatched by any other means, except probably by a fortunate turn of events, such as inheriting the wealth of a departed relative you have never met or striking a substantial oil deposit in your backyard.
In short, shareholders are part "owners" of a company’s assets and its generated income. As the business grows with more acquisition of more assets and enhanced income-production, the worth of the company also increases. This results in the increase of the total value of the business as well as in the proportional value of the stock in that business.
As stakeholders and part-owners of the company, shareholders are given the right to vote or elect the members of the board of directors. This board serves as a set of officers who supervise the primary decisions made by the company managers. These directors are the main players in the corporations throughout the world and possess great power, as a result. For instance, boards can choose to allow a company to invest in itself, pay dividends to investors, buy other businesses or assets, or repurchase stocks from its investors. Although the top managers of a company (those who operate the business from day-to-day) can provide some advice or guidelines to the board, the final decision belongs to the board members. Oftentimes, the board also has the power to hire and fire the company managers.
All is not perfect even in owning stock in a company that is doing well at any given time, as running a business has certain risks. Obviously, being part-owner or a company means sharing in the potential risks latent in any business operation. If the business does not make a positive income, the shares of stock will decrease in value. In case the business folds up, the stock will then become worthless.
Different types of stock
Sometimes, companies can opt to focus the voting privilege of a company to cover only a particular type of stock, limiting the majority of shares to only a select group of investors. As an example, a family business seeking to raise capital by selling equity might create a second type of a stock which they already control and has, for instance, 10 votes for each share, while they release to others another type of stock that allows only a single vote per share.
This, for many people, is not an acceptable deal; and so, many investors usually avoid companies having such multiple types of voting stock. Media companies often have this form of structure which had its inception in 1987.
That is why you hear of Class A and Class B shares, because of this selective classification of stocks.
What happens from now on?
That is about all you need to know for now about the fundamental classes of investment options available to you. You can start impressing some of your friends and relatives about your newfound knowledge on stocks. Use the basic terminology as well as the essential principles of becoming a shareholder of a company to tell them how they can also join in the experience of investing. Most of all, tell them of the potential rewards you and they can expect from buying stocks while reminding them of the greater risks they will encounter compared to merely keeping their money in a bank. In the end, what you will decide to do with your new knowledge will be up to you.
We encourage you to take avail of our newsletter services for a month for free. Our contributors may have diverse views on many issues; but this fact helps to provide you with a wide selection of insights and perspectives on how to succeed in investing. We have a disclosure policy which allows us to be fully transparent in all transactions.
Planning and setting objectives
Investing is a long-term process, like planning a long vacation. Ask yourself these questions before you embark on this endeavor:
- What is your destination? (What financial goals do you have?)
- How long is your vacation? (What is your time frame in investing?)
- What should you bring along? (What investments forms will you choose?)
- How much gas do you need to use? (How much will you invest to achieve your goals? How much can you invest a regular plan?)
- Do you have stopovers on the way? (What short-term financial expenses do you have?)
- How long is your vacation? (Will you have to retire using your investment?)
- If you run out of gas because you frequently stop to rest and drive through the night, you are bound to spoil your vacation. So it is if you do not save enough money, if you invest haphazardly or fail to invest at all.
Answer these questions judiciously and honestly. Muddling through this process of self-examination and preparation will cause you to see the finer points of investing which requires a lot of number-crunching. Calculate accurately how much a college education will cost and how much you will need during your retirement years. It will not only be satisfying to know that you can actually attain your destination, you will also remain aware of what you must do along the way in order to fulfill your future goals.
In case you are panicking because you consider numbers to be a great challenge, do not be alarmed. There are user-friendly online interactive calculators which can assist you estimate your financial goals. As we said, the more realistic and detailed your figures are, the greater the chances of setting and realizing viable goals.
How stock trading works
Now that you have set your finances in order and you have also established definite financial objectives, you are now ready to learn how to begin investing. With mutual funds, the procedure is quite easy: Call the fund company and request them to open an account for you. Dealing with stocks can be a more challenging endeavor.
Stocks are traded at various stock exchanges. The major US exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the Nasdaq Stock Market. Although there are differences in the manner these exchanges perform their trading, the process itself of buying and selling shares requires a similar process in all of them.
Stock exchanges are where buyers and sellers connect. The buyers make a "bid", which is the price at which they are willing to buy a share, while sellers “ask” the price at which they are willing to sell their shares. The “spread” is the difference of the two prices, which often goes to the professionals who manage trades in exchanges.
Depending on the amount of shares traded on a certain day or period, the value of the spread will vary. For traded stocks which are making brisk sales, the spreads will tend to be very small because of competition. Conversely, the spread will tend to be large for stocks being traded thinly, to cover the risk that exchange professionals have to take.
Any investor can establish a bid or ask price by placing orders to buy or sell at a certain price. Such orders are referred to as “limit” orders. Exchange professionals monitor these "open" orders, executing them when conditions are satisfied and utilizing these orders to determine preference for the stock.
Buying stocks is primarily done through brokerage accounts. You may choose between two options: the overly high-priced full-service brokers, or the discount broker. To know more about picking brokers, visit our Broker Center, comparing brokers and choosing the best one who can open an account for you.
The dangers of margin
Through a brokerage account, you can choose between a cash account or a margin account. A cash account allows you trade using available money you are willing to invest. A margin account allows you to buy stocks using other people’s money – which you borrow. Margin accounts can be attractive for obvious reasons; however, the risks can be significant.
Some brokers will advise you to opt for margin as they have hidden interest in doing so, using greater "buying power" as a lure. Remember that what you increase is not only your "borrowing power" but also the risks you take.
Moreover, brokers get some of their killing through collecting interest on margin loans – a sort of commission. The two words (broker and commission) were born twins! As investors borrow more money to buy more stocks, the brokers (who promote margin accounts) collect more commission fees. The broker possesses complete control over the loan collateral, while having the power to interfere and compel you to sell stock in case you are defaulting on your loan. Warning: Margin will milk you dry while the broker gets all the milk and honey.
Direct investment plans (DIPs) and Dividend reinvestment plans (DRPs)
If you think you are not up to opening a brokerage account yet, other plans can provide a different but sure way to buy stock. Nicknamed by investors as Drips, these plans let shareholders buy stock from a company, directly and at low costs or fees. Only a few firms offer these plans, although they are best for investors who only have limited amounts of money to spend at regular periods.
Now that you have gained enough background information on how to start investing in stocks, as well as what your financial goals are, how much money you will need to invest, how long it will take to recover your investment, the next move is to begin considering where to invest and the kind of potential gain you hope to make.
You can get more info from our newsletter services which we offer free for one month. Our contributors may have diverse views on many issues; but this fact helps to provide you with a wide selection of insights and perspectives on how to succeed in investing. We have a disclosure policy which allows us to be fully transparent in all transactions.
What is investing all about? How do you start?
If you have decided to enter the world of investing, learning how to invest must now dominate your time and focus. Two steps will help you on your way.
Initially, you need to rebuild your financial outlook to prepare yourself in investing. After that, learn the technique of investing, for example, how to open a brokerage or a mutual fund account. These basic steps will launch your course to a meaningful and productive investment life.
In essence, investing involves spending your time, effort and resources to attain a higher objective. For instance, you spend weekends with a social group to do charitable work, use your talent in the arts to create works of beauty and value or apply your profession in your job or your business to earn a living. In the same way that you do these things hoping to gain valuable rewards, you likewise invest your money in a bond, mutual fund or stock with the goal of achieving material benefits in the future.
Specifically, investing requires putting your money into what is called a "security" -- a term which refers to anything that is "secured" by other assets. Bonds, stocks, certificates of deposit and mutual funds are some forms of securities you can choose to invest in.
You can select from various methods of investing -- some of which you may be familiar with from watching TV or browsing the Internet. You see a neatly-dressed, overly optimistic lad who stares at you onscreen, seated on a porch in Malibu Beach and fully hyped as to how amazingly easy it is to make big bucks in no time at all! Amusing, it all seems. For if it was really that easy, everyone would have learned the technique to such foolproof method. Unfortunately, only those promoting such wealth-building schemes seem to make money – and at the expense of many disappointed gullible takers.
So, here is the better option for you: Instead of spending $25 on the hardcover EZ Secrets to Untold Billions book and $500 for the EZ Seminar, invest it in yourself once you have gained the fundamental secrets to investing here.
Eradicate your debts now
Now that you are eager to go ahead and start investing once you learn how to, you certainly would want to know the next step. But rein in your enthusiasm for a while. Hold your horses while you check if you are really ready to take the ride of your life in investing. Now that you see the possibilities opened to you through the magic of compounded returns, you have to protect yourself from the same trap which you could be unwittingly locked in. Do away with high-interest debts that you may have at the present.
By the exact same law of compounding rates that will make your investments increase, you can rapidly incur hundreds of dollars in debt over time from a dollar. Having such an enormous debt as you invest would negate all your efforts in investing and saving your money. You will be better off as you are paying off your debt first, than risking your money and exposing yourself to greater danger. Hence, it is wiser to get rid of any high-interest debt first before you consider investing, although some low-interest or tax-advantageous debts can be tolerated.
Make each dollar you invest work for you; this is a mantra you can trust to protect you. This is because each dollar you keep from the hands of full-service brokers or financial professionals will build more wealth for you, as you will soon see.
Reward yourself first of all
To succeed as an investor, you must make investing an integral part of every day. That may sound difficult or tedious; but not really. You must realize that the act of buying something, say a cappuccino, will influence your daily finances as much as acquiring a home-equity loan to cover your credit-card payments.
That is not to say that you must act like a miser who cannot get a good night’s rest over a missing penny in her books. If you reward or pay yourself first, you need not worry so much.
Since you already spend valuable cash for such essential things as gas, water, electricity, credit cards, cable TV, phones and wifi access regularly, why not be the first to get your own precious money – be on top of that list! Keep a certain amount of cash as saving or self-investment each time you get your monthly or weekly check; and go on along as merrily as you can while that money grows over time.
We recommend that you stash away as much as you can; with at least 10% of your annual salary of your gross pay as a reasonable target. Without neglecting your liabilities, you may surprise yourself how much you can save over time. Unless you do it, you will never find out. Of course, the higher the target you set for yourself, the more savings you will create. Save a little; it will come in handy when you need it. The only future you can look forward to is that one you secure for yourself today.
Make good use of online banking and brokerage-service providers. You can set up regular automatic money transfers from your checking account to your savings account (or vice-versa) or from any investing instrument you prefer. Discover how you can live on a lot less than what you spend now; start with discarding some luxuries or any unnecessary trips to the mall or the bar. You will notice a significant difference within a month or two. If you think the sacrifice is not worth the money you saved; then spend it on a trip to a dream destination and see how saving can alter your life in radical ways.
It is never too late to start saving. If you have practically nothing left after all the bills payment, try to reduce the amount you set aside regularly. Maybe the timing is not right for you yet if you find out you cannot afford to squeeze in even a piggy bank. No worries; wait till you are in a position to do so.
Active and passive methods of investing
There are two primary methods of stock investing: active and passive management; and they differ on how stocks are chosen, not on how you choose your verbs. Active investing involves selecting stocks yourself or you can ask your brokers or fund managers to pick the stocks, bonds, and other forms of investments. Passive investing requires you to let your holdings follow an index which a third party makes.
In general, stock investing means active investing. Although it seems preferable over passive investing, active investing does not always turn out to be better. Over the long-term duration, most actively-managed stock mutual funds have not reached the level of the S&P 500 Index, the dominant standard for index funds.
Because of that, some investors choose an alternative to "active" investing. A lot of people prefer passive investing as they are satisfied with a return close to that of a major stock index. You may choose to follow other indexes, such as the Russell 2000 for small-cap stocks, the Wilshire 5000 for the broad market as a whole, and other global indexes.
Speculating versus investing
Perhaps, you may have heard of a close friend who struck it rich with options. Or you may have had moments of lucky streaks in the past where you won a sizeable amount of cash from a raffle or lottery. Why should you then enter into a long and slow process of investing your money which can only bring you a double-digit gain and not bundles of cash right away? Investing demands years of patience before you can finally reap the good harvest. What if you cannot wait that long?
Life does not always bring sunshine and roses when you want it to. We all know that. You will not become a celebrated investor like Warren Buffet if you match the performance of the S&P 500. Neither will losing your savings on some speculative gamble make you a hit overnight nor being in a bankruptcy court after you lose all your other assets later on.
If high-stakes gambling is the thrill you seek, plus all the appurtenant live shows and glittering lights, you are no different from those stock market gamblers who lose their money on apparently legitimate pursuits. We live by the axiom that investors "gamble" each time they put money in a venture they do not understand.
It happens to so many people. They overhear a story from their doctor’s plumber talking about a company named Sweet Pipes at a garden show. "This stock will fly like a rocket in a few months," he whispers. If you rush home and tell your broker to buy 200 shares, you might as well be in Las Vegas!
What business is Sweet Pipes engaged in? Tobacco or garments? Have you any information about its main competitor Bronze Arches? How much did it make last quarter? You need to know a lot more about the company before you toss your precious money to it. Ample study and evaluation can save you a lot of money and anguish.
Speculating, in the end, is a sure way of losing the potential value of your dollar to build lasting wealth for you. It leads you to think of the great gain you can achieve right now while failing to do so, more often than not. On the other hand, your patience in investing can assure you of attaining your goals eventually.
Getting old can bring about so many challenges which schooling and early experience could not train and prepare us sufficiently to eliminate or minimize the pain and loss. Take the case of Max Tharpe, an accomplished photographer, who managed to inherit a large stash of stocks which afforded him a comfortable life in retirement. Having no heirs to pass on his estate, he chose to donate his wealth to charitable church groups when he turned 87. And so, one day he went to the office of Edward Jones & Co. in Fort Lauderdale, Fla. in 2007 for that very purpose.
In February 2008, Mr. Tharpe asked his stockbroker to sell only one position, his Wachovia Bank shares, whose branch had given him such poor service. He also told the broker to maintain all the rest of his portfolio. And this is when the whole thing blew.
Based on the arbitration award handed down by the Financial Industry Regulatory Authority, or Finra, and the narrative account of Todd Zuckerbrod, Mr. Tharpe’s lawyer in the case filed against Edward Jones and its broker, William Holland, the story chronicles the extent to which scammers will go to fleece their clients, even the elderly.
It seems Holland took his sweet time, spending eight months to dispose of 30,464 Wachovia shares in a falling market, while making 81 unauthorized purchases using the sales proceeds. Holland also convinced Tharpe to liquidate a fully-matured insurance policy and to purchase an annuity in which Tharpe paid Holland a fat commission of $49,549.
How could a broker do that to an old man who probably lived a big part of his time visiting or staying in the hospital? An old man who had no way to comprehend, let alone suspect anything wrong with the insurance switch or even with his brokerage account. As he described the testimony at the Finra hearing, Atty. Zuckerbrod stated, “Mr. Tharpe was hardly focused; you could be conversing with him for a few minutes and then, all of a sudden, he would be talking about B-52 bombers flying in the skies.”
This kind of thing can happen to any elderly person – to you or to your parents. You could be 85 or so and still be smart enough to appreciate Warren Buffett’s counsel about index funds. However, two to three years down the road, you could become a sitting duck to clever cons out to cut 20% off your gains who share nothing to cover part of your losses.
How to buy investments
Buying investments can seem daunting if you haven’t done it before. Follow our step-by-step guide.
- Do you need help?
- Checklist for buying investments
Do you need help?
Have you decided what type of investment you want? Are you reasonably sure of what investment or product features you are looking for? If not, consider going to a financial adviser. The adviser will help you with these choices and with the buying process.
Checklist for buying investments
Are you intending to buy individual shares? You need to use a share dealing service and the cheapest tend to be online. You can find out about different types of service and search for a provider by:
- Visiting the Wealth Management Association website.
- Using the Investors Chronicle stockbroker comparison tool and table.
- Are you looking at investment funds? Use the Investment Association website to find out more about the types of funds available and where to go for more information. To compare these and other types of funds in more detail, you could look at specialist sites, such as Trustnet and Morningstar.
Where to buy investments
- Decide how you want to buy – for example, going direct to the provider, through a fund supermarket or through a broker. Usually you will buy online or by phone. Follow the link below to check out your options.
- Before you buy, consult the Financial Services Register run by the Financial Conduct Authority (FCA) to check the firm you decide to buy through is authorized to provide the types of investment or service that you’re interested in. If a firm isn’t authorized, report it to the FCA or police and do not do business with it.
- Read the Key Facts or Key Investor Information document for the investment before you buy. These documents set out important information that the provider must tell you (not required for single holdings of shares). If there is anything you do not understand, contact the provider for further details. If you are still unsure, you may want to consult a financial adviser.
- Check what fees and charges you will have to pay. Charges for the same product may vary according to how you buy or which broker you choose. So compare the cost of buying through different routes and firms.
Understanding investment fees
Check how you will be able to manage and keep track of your investment. For example, will you be sent regular statements? Will you have an online account? What’s the procedure for cashing in your investment later? How will you and the provider normally communicate – by email, online, phone, post?
Get more informed about investing
- Be suspicious if an investment seems too good to be true. Unless you can check what you are being told against an independent, trusted source, report the firm selling it to the FCA and walk away.
- Don’t be swayed by offers that require you to make up your mind today. It’s better to take your time to consider a deal properly even if it does cost a little more rather than be rushed into an expensive mistake or a scam.
A beginner’s guide to scams
- If the firm you are dealing with puts pressure on you in any way, don’t do business with them. They may want you to take a quick decision without time to consider whether the product is right for you. Or they might pressure you to buy a different type of product to the one you wanted, or invest more than you intended. Instead, use a different firm that you’ve checked is authorised by the FCA. Or, get independent advice.
High risk investment products
Beware toxic savings and investment products
- Once you have decided to buy, follow the firm’s instructions for going ahead with the deal. You will probably have to provide evidence of your identity and address - even if you have bought online or by phone, you may need to do this by post or in person at a local branch.
- Carefully read the documents you get confirming your investment. Are the details correct? Do you have a cooling-off period? If you do have a cooling-off period, this is a chance to reconsider your investment and change your mind if you want to
If you’re looking to invest, buy a financial product or plan for the longer term, whether or not you need financial advice will depend on a number of factors such as what product you are looking for, how complicated your finances and personal circumstances are and your short and long-term goals.
- What services do financial advisers offer?
- Types of financial adviser
- What are the benefits of getting advice?
- So when do you need financial advice?
- Find a financial adviser
- What services do financial advisers offer?
Professional financial advisers carry out a ‘fact find’ where they ask you detailed questions about your circumstances, your goals and how you feel about taking risks with your money. Then they recommend financial products that are suitable and affordable for you.
Types of financial adviser
Financial advisers offer services ranging from general financial planning and investment advice, to more specialist advice, such as the suitability of a particular product such as a pension.
In the case of investment products, some advisers are ‘independent’ – meaning they offer advice on the full range of investment products from the market, while others offer a ‘restricted’ service meaning that the range of products or providers they will look at is limited.
What are the benefits of getting advice?
If you buy based on financial advice and a recommendation, you should get a product that meets your needs and is suitable for your particular circumstances.
Depending on the type of adviser you use, you may also have access to a wider range of choices than you’d be able to assess realistically on your own. You also have more protection if things go wrong if you buy based on advice – see below.
The difference between advice and ‘non-advised’ sales
Many banks, building societies and specialist brokers will talk you through your different options and leave it up to you to decide which product to take. In this case you are buying based on ‘information’ and have fewer rights to claim compensation if the product turns out to be unsuitable.
By contrast, if you end up with an unsuitable product after getting advice and a recommendation you could have a case for ‘mis-selling’ – though this doesn’t protect you against making losses if the market goes up or down.
What do you pay for financial advice?
The rules on fees for financial advice changed from 31 December 2012. If you are looking for general financial planning advice or for advice on buying particular investments you will pay a fee. Advisers must be clear upfront about what their fees are and agree with you in advance how you will pay them.
Before these changes, many financial advisers didn’t charge, but instead received a commission which was deducted from the customer’s initial or ongoing investment payments.
The changes were introduced to help make the cost of financial advice clearer and so that you can be sure the advice you receive will not be influenced by how much the adviser could earn from the investment.
Mortgages and most insurance products are not affected. However, some mortgage brokers may still charge upfront fees for advice, while others receive a flat rate introducer’s fee from the product provider. Receiving mortgage advice directly through your lender is usually free.
Is it cheaper to buy without advice?
You won’t have to pay an advice charge if you go direct. But you should weigh up the cost saving against potentially buying an unsuitable product or one which gives poor returns.
Advice can help you buy a better product than one you choose yourself. An adviser will also have the expertise and knowledge to find better options, as some products are only available if you go through an adviser.
So when do you need financial advice?
The answer partly depends on the product and partly on other factors.
Cash savings products
If you’re looking to put money into savings accounts, cash ISAs or fixed rate savings bonds it’s easy to DIY using comparison sites and tables. Because of the low risk you don’t need to get financial advice and you can buy directly from providers very easily.
If you’re thinking of investing in shares, unit trusts and other investments, you can go DIY but it will be more risky because these products are harder to understand than savings. There’s also a risk that you might lose money or buy a product that’s not suitable for you because you don’t understand it. So you really need to do your homework.
Ask yourself these questions:
- Do you have the time to do the research?
- Do you have much experience, knowledge or skills when it comes to investing?
- Can you afford to lose any money?
- If things go wrong, are you comfortable taking responsibility for any bad investing decisions?
If the answer to any of these is ‘No’ then seeking financial advice may be your best option. When trying to decide, also bear in mind the cost of fees against the financial and emotional cost of getting it wrong if you buy without advice.
Insurance or mortgages
Some insurance products and mortgages can be purchased using price comparison websites, or bought directly from suppliers.
However, there are also plenty of specialist brokers who will talk you through a range of options and may be able to get you a better deal. It’s up to you whether you buy with or without advice.
If your employer offers a workplace pension they may also offer you access to advice or provide guidance about joining their scheme. You should take up this offer if available.
If you’re looking to invest in a personal pension, to boost your existing pension or to merge different pots from existing pensions it’s usually best to get advice unless you really understand how these products work.
Pensions are long-term investments so you need to be sure you understand the types of fund you’re investing in, the risks and the suitability for your particular situation.
Find a financial adviser
If you think that financial advice is for you, read our guide below to understand more about independent versus restricted advisers and to link to organizations that will help you find an adviser in your area.
By: Kyle Woodley
U.S. News & World Report ranks the best exchange-traded funds for tech lovers.
Semiconductors, software and IT services.
The heart of the technology sector's earnings season typically brings with it a lot of big swings, even in the bluest of blue-chip tech stocks. But you can avoid the volatility from quarterly tech earnings season by getting some of your exposure in a more well-rounded way: via exchange-traded funds, which let you invest in the sector as a whole, or in specific industries such as Internet companies or semiconductor makers. Here's the top 10 tech ETFs as of this writing, as ranked by U.S. News & World Report.
- Vanguard Information Technology ETF (VGT)
The dirt-cheap VGT is also a strong performer, beating out the S&P 500 in total returns at 143.46 percent to 136.74 percent since inception in late January 2014, and it's no slouch at $9 billion in assets under management. Still, the XLK has the overall performance advantage, with 148.72 percent gains in that time. VGT is similarly constructed, though telecoms like AT&T and Verizon Communications (VZ) are utterly absent. If you're driven by paying the absolute least for broad tech exposure, you'll want to lean toward VGT.
- Technology Select Sector SPDR ETF (XLK)
The XLK is the gold standard for tech funds – both the well-recognized and the largest with nearly $14 billion in assets under management. The XLK is a collection of all the tech favorites – Apple, Microsoft and Facebook, though it also features AT&T (T) in its top five holdings. The XLK also is one of the cheapest tech ETFs out there, and it even has a performance edge over the lifetime of the top-ranked fund out there, which we'll look at next.
- Guggenheim S&P 500 Equal Weight Technology ETF (RYT)
The RYT is, as the name would suggest, an equal-weight fund that invests in the Standard & Poor's 500 index's tech stocks -- 68 blue-chip names. Thanks to the equal weighting methodology, no stock makes up more than 1.7 percent of the holdings. RYT has a heavy bent toward IT services and semiconductors, each at nearly a quarter of the fund. One note with the last of our equal-weighting funds – the methodology provided better diversification, but in the tech sector, not always (or even often) better returns.
- iShares U.S. Technology (IYW)
The IYW would seem to be pretty spread out given that it has 140 holdings within America's tech sector. However, this fund is extremely concentrated at the top, with the top five companies representing more than half of the IYW's weight. Apple alone is a massive 17 percent of the fund, and Microsoft and Alphabet (GOOG, GOOGL) each take up 12 percent. This is a great fund when all is going well for technology's most blue-chip stocks, but when the chips are down … watch out.
- iShares Exponential Technologies ET (XT)
The iShares' XT ETF aims to be at the forefront of the tech sector's prevailing trends, using what it calls a "unique evaluation process to identify companies developing and/or leveraging promising technologies." As a result, XT is invested in things such as 3D printing via 3D Systems Corp. (DDD) and Indian IT outsourcing via Wipro (WIT). This is another equal-weighted fund, with no stock making up more than 1 percent of the fund. Nearly 30 percent of the fund is invested in health care technology.
- iShares North American Tech ETF (IGM)
The IGM is another broad-based tech fund, with this one focusing on roughly 275 North American tech companies. This is a traditional cap-weighted fund, so 30 percent of the fund is concentrated in its top 10 holdings, led by MSFT, AAPL and FB. However, investors are treated to a decent industry spread, with double-digit portions of the fund invested in five areas, including Internet software, storage and semiconductors. Internet retail comes close at nearly 9 percent of the fund.
- Fidelity MSCI Information Technology Index (FTEC)
The FTEC is a broad-based ETF, focusing on mostly large-capitalization, growth-oriented stocks within the tech sector. Thus, you get consumer-facing hardware companies like Apple, software companies like Microsoft, Internet companies like Facebook (FB) and even payment tech companies such as Visa (V). While the FTEC is diversified in that it holds nearly 400 companies, this still is a top-heavy fund, with the top five companies weighted at nearly 45 percent, including a 13 percent-plus weighting for Apple – a common theme among many big tech ETFs.
- Market Vectors Semiconductor ETF (SMH)
The SMH also invests in the tech sector's semiconductor subsection. This is a very niche ETF of just 26 holdings currently, all involved in the production or other aspects of the chip business. Top holdings Intel Corp. (INTC) and Taiwan Semiconductor Manufacturing Co. (TSM) make up more than a quarter of the fund, but SMH offers some geographic diversification – a little more than 30 percent of the fund is invested in stocks from Taiwan, the Netherlands, Singapore, the U.K. and Bermuda.
- SPDR S&P Semiconductor ETF (XSD)
The XSD is a diversified, balanced fund of semiconductor companies, almost all of which are in the U.S. What is notable is its equal-weighting methodology – XSD weighs each of its 40 holdings the same at each rebalancing so no one stock has an outsized effect on the ETF. However, weights do fluctuate in between rebalancing depending on performance, so currently; top holdings are Inphi Corp. (IPHI), Nvidia Corp. (NVDA) and Advanced Micro Devices (AMD).
- iShares Global Tech (IXN)
You would imagine that the iShares Global Tech ETF took a worldwide view of the technology sphere, and you'd be less than a quarter correct. Less than 25 percent of the fund is invested in domiciled outside of the U.S. with Japan leading the way at 5.1 percent. With heavily weighted top holdings such as Apple (AAPL, 12.5 percent) and Microsoft Corp. (MSFT, 8.9 percent) this fund shares a lot in common with most other broad tech funds.