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.