Personal investment accounts come in various forms, such as an individual investment account or a self-directed online brokerage account. The main benefit of managing a personal investment account is having control of which investments go in and out of the accounts. On the other hand, making personal investment choices leaves you without the help of a professional adviser who can help you reach your financial objectives and navigate through rough patches.
Personal Investment Accounts
An IRA and Roth IRA are examples of personal investment accounts. An IRA allows you to set aside pre-tax dollars on an annual basis to invest for your retirement. You may choose to allocate the funds in your IRA account into any financial instrument you wish like stocks, bonds and mutual funds. A Roth IRA differs from a traditional IRA in that you fund a Roth IRA with after-tax dollars. Investments grow tax-free in a Roth IRA and you don't pay taxes on withdrawals from the fund upon retirement. There are other personal investment accounts to choose from, such as directly investing in stocks, bonds, mutual funds and other financial instruments through a personal brokerage account, whether online or through a securities brokerage firm. You may also invest in an employer-sponsored 401(k) plan, which allows you to allocate funds among a family of mutual funds.
The main advantage of a personal investment account is that you make decisions regarding how to allocate your funds in the account based on your assessment of risk and investment criteria. The destiny of your portfolio is in your hands, for better or worse. If you set up your personal investments through an online brokerage account, you can buy and sell investments at your own pace. This means that if you purchased 100 shares of a company and want to buy additional shares, you can do so with just a click of your mouse. Many online brokerage services offer financial reports and other investment tools to help educate investors.
A major disadvantage of a personal investment account, such as an IRA or Roth IRA, is the lack of access to professional investment advice. Investing in a 401(k) provides access to a mutual fund manager, but you have no control in what investments go into or out of the portfolio. If you have the advice of an investment professional, she can help you navigate the ins-and-outs of the market to help you reach your investment objectives. The job of an investment professional is to stay current on the latest happenings in the overall market. Many individual investors simply do not have the time to keep abreast of the latest news and trends. As such, an investment professional can alert you to sudden drop in your investment portfolio and make recommendations to help keep you on track for meeting your investment goals.
Personal investing is risky. One bad investment can wipe out your portfolio. However, an investment portfolio managed by a professional is less likely to suffer extreme volatility because of greater diversification. The idea behind diversification is not putting your eggs in one basket. For example, simply investing in one stock exposes you to the risk associated with the company to such things like the economy or a bad business decision by company management. On the other hand, investing in a basket of stocks, particularly those in different business lines, helps to protect the investments in your account from extreme price movements. You can also invest in mutual funds for further diversification or pair it with an investment in all-stock fund with a bond fund.
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