Creating an Investment Portfolio (Older Investor)

Part One
The two type of investment for senior citizens with low risk and amount of
interest in return can help them save for after retirement period are:
Bonds: The advantages of bonds are that they are low risk (meaning the
chances of getting your money back are pretty much guaranteed), they
are paid a fixed amount of interest over a period of time at regular
intervals, and investors can sometimes purchase them at a discount. The
disadvantage is that the rate of return (amount profited) is usually lower
than other investments.
Certificates of Deposit: The advantages are that they can cost little and
investors can choose among terms of maturity and they have relatively
low risk. The disadvantages are that you give up some liquidity (ability to
easily and quickly convert to cash) of your money for a certain period of
time and while the interest earned is higher than a savings account, it is
also lower than other types of investments.
A bond is a debt investment in which an investor loans money to
an entity (typically corporate or governmental) which borrows the funds
for a defined period of time at a variable or fixed interest rate. Bonds are
used by companies, municipalities, states and sovereign governments to
raise money and finance a variety of projects and activities. Owners of
bonds are debt holders, or creditors, of the issuer. When companies or
other entities need to raise money to finance new projects, maintain
ongoing operations, or refinance existing other debts, they may issue
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bonds directly to investors instead of obtaining loans from a bank. The

indebted entity (issuer) issues a bond that contractually states
the interest rate (coupon) that will be paid and the time at which the
loaned funds (bond principal) must be returned (maturity date). The
issuance price of a bond is typically set at usually $100 or $1,000 face
value per individual bond. The actual market price of a bond depends on a
number of factors including the credit quality of the issuer, the length of
time until expiration, and the coupon rate compared to the general
interest rate environment at the time.
Varieties of Bonds
Zero-coupon bonds do not pay out regular coupon payments, instead, are
issued at a discount and their market price eventually converges to face
value upon maturity. The discount a zero-coupon bond sells for will be
equivalent to the yield of a similar coupon bond.
Convertible bonds are debt instruments with an embedded call option that
allows bondholders to convert their debt into stock (equity) at some point
if the share price rises to a sufficiently high level to make such a
conversion attractive.
Some corporate bonds are callable, meaning that the company can call
back the bonds from debtholders if interest rates drop sufficiently. These
bonds typically trade at a premium to the non-callable debt due to the risk
of being called away and also due to their relative scarcity in today's bond
market. Other bonds are putable, meaning that creditors can put the bond
back to the issuer if interest rates rise sufficiently.

A certificate of deposit (CD) is a savings certificate with a

fixed maturity date, specified fixed interest rate and can be issued in
any denomination aside from minimum investment requirements. A CD
restricts access to the funds until the maturity date of the investment.
CDs are generally issued by commercial banks and are insured by
the FDIC up to $250,000 per individual. Although it is still possible to
withdraw money from a CD prior to the maturity date, this action will often
incur a penalty. This penalty is referred to as an early withdrawal penalty,
and the total dollar amount depends on the length of the CD as well as the
issuing institution. Typical early withdrawal penalties are equal to an
established amount of interest.
CDs of less than $100,000 are called small CDs. Some of these CDs will
have minimum investment requirements. For example, a financial
institution may require at least $1,000 for a CD to be opened.
CDs for more than $100,000 are called large CDs or jumbo CDs. Almost all
large CDs, as well as some small CDs, are negotiable. The term of a CD
generally ranges from one month to five years.
CDs operate under the premise that an individual forfeits liquidity
for a higher return. Under typical market conditions, long-term CDs have
higher interest rates when compared to short-term CDs. There are more
uncertainty and risk associated with holding the investment for a long
period of time. In addition, because an individual is forgoing the
opportunity to utilize the funds for a specific period of time, he is
compensated by earning more interest.
The reasons why there is a difference between the investment plans for
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older and younger investors is, first, many financial planners argue, that
older people don't have as many years ahead of them as do younger
people. Second, some financial planners emphasize that asset allocation
is often shaped by the necessity of meeting relatively large obligations in
midlife, such as college tuition for children. To meet these financial
targets, investing a lot in stocks may be necessary for a while, but not
after enough resources have accumulated and finally, some financial
planners point out that a younger person can use wages to cover any
losses from increased risk while an older person cannot.

Creating an Investment Portfolio (Younger

Investor)
Part Two
A stock is a type of security that signifies ownership in a corporation and
represents a claim on the part of the corporation's assets and earnings.
There are two main types of stock: common and preferred.
Common stock usually entitles the owner to vote at shareholders'
meetings and to receive dividends. Preferred stock generally does not
have voting rights, but has a higher claim on assets and earnings than the
common shares. For example, owners of preferred stock
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receive dividends before common shareholders and have priority in the

event that a company goes bankrupt and is liquidated. A holder of stock
(a shareholder) has a claim to a part of the corporation's assets and
earnings. In other words, a shareholder is an owner of a company.
Ownership is determined by the number of shares a person owns relative
to the number of outstanding shares. For example, if a company has 1,000
shares of stock outstanding and one person owns 100 shares, that person
would own and have claimed to 10% of the company's assets. Stocks are
the foundation of nearly every portfolio. Historically, they have
outperformed most other investments over the long run.
A money market fund is an investment whose objective is to earn
interest for shareholders while maintaining a net asset value (NAV) of $1
per share. A money market funds portfolio is comprised of short-term, or
less than one year, securities representing high-quality, liquid debt and
monetary instruments. Investors can purchase shares of money market
funds through mutual funds, brokerage firms, and banks.
A money market fund's purpose is to provide investors with a safe place
to invest easily accessible, cash-equivalent assets. It is a type of
mutual fund characterized as a low-risk, low-return investment. Since
money market funds have relatively low returns, investors such as those
participating in employer-sponsored retirement plans, might not want to
use money market funds as a long-term investment option because they
will not see the capital appreciation they require to meet their financial
goals. Aside from being low risk and highly liquid, money market funds

may be attractive to investors because they have no loads, which are fees
mutual funds may charge for entering or exiting the fund. Some money
market funds also provide investors with tax-advantaged gains by
investing in municipal securities that are tax-exempt at the federal and/or
state level. A money market fund might also hold short-term U.S. Treasury
securities, such as T-bills; certificates of deposit (CDs); and corporate
commercial paper. A downside of money market funds is they are not
covered by federal deposit insurance. Other investments with comparable
returns, such as money market deposit accounts, online savings accounts
and certificates of deposit, are covered. However, money market funds
are considered safe investments and are regulated under the Investment
Company Act of 1940.
The younger investor would choose these types of investment
because if we begin investing at a young age history tells us that we will
end up with far more than those who invest later in life. Compounding
returns are extremely powerful over the long run, and the earlier you get
started the greater your chance is to take advantage of this. Put more
simply this is the power of the time value of money. Regular investments
in an investment portfolio or a retirement account can lead to huge
compounding benefits. The basic quality of life is a huge benefit of being
an early investor. By investing early in things such as Roth IRAs and
retirement accounts we should be able to avoid having to make frantic
moves near or during retirement. The quality of life during our retirement
years will be much better because there will be less stress.