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When you calculate the effects of inflation on your investment and the taxes you pay on the earnings, your investment may return very little in real growth.
If you can’t accept much risk in your investments, then you will earn a lower return as noted in the previous section.
Another type of investment, mutual funds, makes sense for many investors because they're generally managed by professional portfolio managers so that you don't need to worry about watching the market or monitoring a stock portfolio.
Mutual funds work like a basket of stocks or bonds, and when you buy shares of a mutual fund you get the benefit of the variety of assets held within the fund.
When you purchase bonds, you're essentially lending your money to a corporation, municipality, or other government entity, depending on which bonds you buy.
Bonds generally provide more safety than stocks, but pay attention to each bond's rating from such rating agencies as Moody's or Standard & Poor's.
When you buy government bonds, you receive a guarantee from Uncle Sam that you'll get your money back plus interest.
Some of these instruments carry more risk than others, and within each asset class, you'll find that risk can also vary quite a bit.
Most people have stocks in their investment portfolio, and for good reason.
You can choose from a wide variety of funds with different risk profiles.
Some hold large-company stocks, some blend large- and small-company stocks, and you can also buy shares in mutual funds that hold bonds, gold and other precious metals, shares in foreign corporations, and just about any other asset type that comes to mind.
While mutual funds don't completely diversify away risk, you can use them to hedge against risk from other investments that move in the opposite direction.