I'm guessing that you are investing in mutual funds not individual stocks. (But you might be doing both.)
The mutual funds pool money from other investors and buy a "basket" of stocks. So if you buy a transportation mutual fund (say fund XYZ) they are buying stock in several companies all at once. ...
Best answer: I'm guessing that you are investing in mutual funds not individual stocks. (But you might be doing both.)
The mutual funds pool money from other investors and buy a "basket" of stocks. So if you buy a transportation mutual fund (say fund XYZ) they are buying stock in several companies all at once. Not just companies like UPS & Fed-Ex, but also CSX (Trains), JB Hunt (Trucking) and freight liners to name a few.
If you're buying a banking fund you are investing in companies like Citibank, Chase, PNC, Wells Fargo, American Express, Visa, Master Card, etc.
As these individual stocks go up and down the mutual fund value goes up and down. Fund XYZ will go up when the transportation stocks do well and go down in value when the don't.
Buy buying a basket of funds you are reducing your risk on if a single stock will go up or down. If UPS went out of business tomorrow (think Kmart, or Kodak) and you only owned UPS then you would be out of all your money. By buying the mutual fund instead of the individual stock you are "diversifying" your investments.
Stocks make money in two ways. One is if they pay out a dividend. Think compounding interest if you reinvest the dividends over time. The other way is if the stock goes up in value. Someone else gave an example about if you bought a $100 stock and the value went up to $200. Keep in mind the stock could also go down in value to $50 or even zero (Toys R Us and maybe soon Sears.)
The mutual fund helps mitigate losses, so if UPS went down 10% and Fed Ex went up 5% trucking up and freight liners down then you wouldn't be so bad off. You might not make as big a gain as if you took a risk on an individual stock, but you reduce the risk of losing money (not eliminate risk.)
So your IRA grows by dividends and the value of the stock. (Also any additional contributions that you make over time.)
The Roth is not guarded against future inflation it is guarded against future TAXES (At least for now.)
A Traditional IRA you put in money before taxes are take out.
Say you put $5000 in a Traditional IRA when you claim your income on your taxes you get to reduce your income by that amount, so if you earned $55,000 in a year the IRS will adjust that to $50,000 and only tax you on $50,000 worth of income. When you take money out of your traditional IRA you then have to pay taxes on what you take out at whatever the current rate will be when you retire. (It's an unknown.)
If you put $5000 in a Roth IRA and you earned $55,000 for the year the IRS will tax you on $55,000 of earnings. But when you take money out of your Roth IRA after you retire then you will not have to pay any taxes on what you withdraw (you paid the taxes up front.)
2 weeks ago