Expert: Gina Boykin - 12/31/2007

Question
Hello,
Quick demographics: 23 yrs. old, single, plan on living at home for another year or so, have $53k in cd's and savings accounts. My CD's are at 5%. The gains are alright considering they are for 6-7months. I am interested in larger gains than what the CD's are producing..What are some suggestions that you would offer..Anything would be beneficial..Thanks for your time

Answer
If you have a plan for your money that is longer than 5 years, you do have some other options.  If you will need the money before then, you are actually just fine with the CDs.   I know it's boring, but you don't want the risk when you will need the money fairly soon.

Assuming you will use the money after 5 years, here are some options.

The best options for beginners are mutual funds, index funds, or ETFs (exchange traded funds).  You can either buy these funds in a Roth IRA, which is a retirement account, or in a regular brokerage account.  If you chose the Roth IRA, you can still take your contributions out after the account has been opened for 5 years, without penalties.  This applies to contributions, but not the gains.

There are mutual funds, index funds, and exchange traded funds for stocks and bonds.  If you are interested in regular cash flow/income, then bonds are the way to go.  Bonds are basically loans to corporations (corporate bonds), federal governments (treasury bonds), local/state governments (municipal bonds or "munis"), or other government entities (like Fannie Mae or Freddie Mac).  These  "loans" carry interest rates, and the interest is paid to bondholders.  Each year, bondholders receive interest, and at maturity (when the bond period ends), they receive their principal back.

There's also stock funds, which doesn't provide regular income, but can provide growth.  

To start out, it may be best to just invest in an index fund or ETF.  Both of these funds follow an index (like the S&P 500, or even the whole stock market).  The differences are these:

Pricing - Index funds are priced on their NAV, which is the average of all of the underlying stocks/bonds price at the end of the day.  The NAV is calculated at the end of each trading day, so you can only buy/sell at this time.  ETFs have their own price, so they can be traded during the day at any time.

Commission - ETFs have a commission, just like stocks.  You don't pay commission with index fund.

Expenses - ETFs have the lowest annual management fees.  Index funds, while very low, are still higher than ETFs.  Regular mutual funds are higher than both ETFs and index funds.

Bottom line - if you will invest a lump sum of money, an ETF is the way to go.  If you will be investing small amounts every month or quarter, index funds are better.  Remember that there are ETFs and index funds for stocks and bonds.

Check out www.fool.com or www.investopedia.com for more information on mutual funds and ETFs.  There is also a wealth of information on the individual brokers websites (like Fidelity, Vanguard, ETrade, Charles Schwabb).