Stocks, Bonds, or Mutual Funds?

First, some definitions:

• STOCK: a little piece of the pie; part ownership of a company.

• BOND: an IOU from the government or a corporation. All your money gets repaid with interest, on a specific date usually ten or more years in the future.

• MUTUAL FUND: a goodie bag that might include stocks, bonds, options, commodities, and securities. Your money goes into a multi-investor pool managed by professionals.

Secondly, a tip: INVEST! Regardless of your age or income, and no matter the vehicle you choose, put your money somewhere it's going to work for you while you go about your everyday life. Instead of blowing your cash on useless junk like another video game or handbag, it's best to put it into stocks, bonds, or mutual funds.

Hopefully you've been wise enough with your earnings to open a savings account. If not, make it this year's goal to put away a little nest egg you can draw from later. If you think you'll be tempted to tap into it prematurely, try a one-year CD. With your money tied up in the bank until the end of 365 days, you'll earn a little interest, learn a little patience, and probably come to agree with good ol' Benjamin Franklin's valuable financial principle, "a penny saved is a penny earned." But don't let a savings account be your only investment vehicle.

Consider the average return on money placed in a savings account: 5%. Consider the average return on money placed in the S&P 500 this past decade: 19%. Big difference, yes? Now, perhaps you believe that investing is only for those with beaucoups dollars; total myth. It's possible to start your investment portfolio right now, even if you only have 20 bucks a month to spare. Here's how:

• STOCKS. The Dividend Reinvestment Plan, also known as a "Drip", is now offered by over 1,000 major corporations. The Drip lets you bypass brokers and invest directly into a company, and with low fees and automatic withdrawal plans, it's easy to slap down a $20 bill each month and get your portfolio rolling. Stocks are a ton of fun, much like a game of strategy and luck. As with any game, once you're familiar with the rules, setups, and tendencies of other players, you can start getting really good at winning. There is always the element of risk, so be smart, but as any successful investor will tell you, risk is half the appeal! The other half is reaping a reward, which can occur quite often in the stock market.

Now, say you have $100 to invest and you're hoping for a long-term, relatively safe option. Where should it go?

• MUTUAL FUNDS. It is the opinion of this author that the only mutual fund worth its weight -- and wait -- in gold is an index fund like the S&P 500, which is a financial cross-section of 500 publicly-traded companies. As mentioned before, the S&P has been a sure bet the last ten years with an almost 20% return, but even before that it was averaging 11%. Suited best for the long haul and often used as an IRA -- which, by the way has excellent tax benefits -- an index fund is a great way to instantly diversify. (As you'll come to find out, the word "diversify" is a buzzword in the investment world, much like "publicity" in the entertainment industry: it's too often repeated, but neverthless remains an essential element of good business.)

More options do open up as you have more money to invest and maybe you'll start playing around with real estate or Forex, but one area to always go easy on is:

• BONDS. A common mistake, by retirees especially, is to delve too far into bonds. Because the monthly payout can create a sense of security, it's tempting to regard a bond like steady income, but the problem is that inflation happens. That once-hefty monthly check for $500 won't buy as much ten to fifteen years from now. Also, consider that from 1926 to 2001, the average return on a long-term government bond was only 5.3%, and even less for the short-term government bond, 3.9%. Not too impressive. The best advice to heed is that of your trusted financial advisor who knows your portfolio well. He or she can tell you exactly what percentage of your money should funnel into bonds, but I say tread lightly.

To sum it up, stocks are fun and can be volatile, interactive, and very profitable. Bonds are less attractive because of inflation, and mutual funds are ideal for safe and long-term investing. However you go about it, be wise with your money and remember:

"The best place to start is where you are with what you have." ---Charles Schwab.

Happy investing.