What kind of stock funds are out there?

First we have domestic (US funds) and international funds (everywhere else). I assume that other countries also have their own domestic funds. International funds can also be separated into area on the world or types of countries (emerging markets vs first world countries). We also have value and growth funds. Growth funds are easy to understand, they are stocks that we believe will grow well, normally do not have dividends but are more risky, whereas value funds are thought to be undervalued in price and that are likely to pay dividends. I prefer value funds but growth funds are needed in your asset allocation.

Stocks are also broken down by the capilztion of the company. Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. A large cap fund has stock wit over $5 billion capitalization, a medium cap has between 2billion and 10 billion. See some crossover there? A small cap fund definition varies depending on the brokerage company but normally is between $300 million and $2 billion. I find it harder to find international funds that separate into all the different caps (I often find large and small), and I have never found a emerging market fund that did so.

And last but definitely not least, you can buy real estate on the stock market using REITs. REITs can either be residential or commercial.

This is very complicated and can get confusing when people are starting off with it. Feel free to ask questions or clarifications, I'll be checking back. My next article will go into my preferred allocation, why I deviate from it and why that is ok.

Stocks vs Bonds

I was helping a classmate start up a Roth IRA last week and got asked a simple question, How do I make money in my Roth? And with that, I realized that many people do not learn growing up what a stock or bond is and that is part of the basic understanding you need to invest and make money for retirement. So let's get to it.
A stock is a percent of a company vs a bond is a loan to either a company or government. You can buy either or both but I do not recommend it. Most people do not have enough knowledge or money to investigate companies and buy enough so that if one false they do not lose everything. So we are back to, how do you make money in your Roth? Simple, stock and bond FUNDS.

Professionals buy types of companies and market them to the consumer and you buy into a portion of that fund. You pay the company a percentage of the money you have in the fund in exchange. The easiest fund is a target date fund. You tell the company when you want to retire, and then pick the fund closest to that date. The fund is designed with all different types of stock and bond funds to give you the best chance of retiring at that date. Target date funds are great for the newbie investor because you only need one fund to diversify which means you need less money to start off with. However, they do cost more than basic funds so once you get up to about $25,000 (my next mini-goal) you do have to learn about the other types of funds and how to allocate your money. Next article we will get into the different types of stock funds and later how "experts" say you should allocate your money and how I disagree.

Update on the millionaire goal- March 2012

We are doing so much better, both because of the stock market and because of getting new tenants. We now have $12,305 set aside for retirement. I am almost half way to my mini-goal of $25,000. It looks like it will take about three years to get there but maybe the stock market will be kind and we will get there sooner. Given that as of February I thought it would take us another four years, I am pretty happy. I did end up adding the money I was undecided about to the Roth IRA instead of paying down my student loans so that helped as well. I'm in the process of rolling over my 401k to my traditional IRA and trying to decide if I should keep it at Fidelity or move it on to Vanguard.