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Accumulation of Capital-How?

There are many means of accumulating capital from a pool of investment money or principal. Some of these include certificates of deposit, money market funds, savings account balances, stocks, bonds, mutual funds, real estate investments, precious metals or diamonds and a number of other types of investment vehicles. Before one decides what investment vehicles to utilize to achieve certain financial planning goals, one should decide to accumulate this money. One way to accumulate income would be to have money withheld from a paycheck on a regular basis. Another way to accumulate money is to invest in the stock of the company for which you work. Often there are matching funds available in this situation. Another situation in which to accumulate money is to place it into an individual retirement account. Another way is to utilize a 401K retirement plan which enables an employee to withhold money, sometimes matched by the employer, and direct the investment of that money as the employee chooses, not as the employer chooses.

Analyzing the Analysis of Investment Portfolio Form, we can see that there are all types of investment vehicles available for a person planning for their financial future. Certain types of investments may make money in a very conservative, albeit, slow manner. These include Certificates of Deposit, Money Market accounts, Savings accounts at banks, and a number of related types of investment vehicles. These are very safe investments, and are usually, but not always, backed by insurance, underwritten by the federal government, such as FDIC insurance funds and usually will have very little, if any risk to your original principal. The drawback is, of course, that the investment returns are fairly insignificant, usually less than five percent, and the accumulation of income is deliberate, but not spectacular.

Next are bonds. If you think of a bond as a loan to a company, a city, a water district or other entity, you will better understand the nature of your investment. In previous decades, bonds were excellent investments, particularly for older age and retired Americans. They provided a fairly safe and better than the Money market account rate of return. The rate of risk was fairly minimal, although it was considered to be more significant than that of a savings account.

The problem is that bonds depend upon interest rates and changes in interest rates. When interest rates rise, the new issues of bonds that are paying the interest rate of, for example 8% a month may be higher than the interest rate on the bond you currently hold which may be 7%. A person would like to purchase an 8% interest rate on a bond, rather than a 7% interest rate on a bond, all other things considered equal since the 8% bond will return more money than the 7% bond. The rate of the bond is tied to interest rates, but also to the bond rating of the investment vehicle. If the two bonds have equal bond ratings, than it is a forgone conclusion that the bond for 8% is the better investment.

Consequently, if interest rates go down, the person holding the 8% bond is in better shape than the person ready to purchase a 7% (current interest rate) bond. We recently experienced, however, the 8% bonds if interest rates fall too low are "called" and the investment is paid off. This leaves the investor with no investment bond or no choice but to buy a 7% bond, if in fact the investor wishes to remain in the bond market. Thus, there is a certain amount of risk in putting all your money into bonds when interest rates may fall.

Other Investment Vehicles. We will discuss a number of the investment vehicles, such as stocks, mutual funds, and other significant investments in their entire following chapters, since these are most common investment vehicles, and understanding these may help a person understand the need for financial planning for the future.

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