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keep up their distributions, the dividends paid to inves-
tors make these shares less risky to own than many
other stock categories.
Cyclical stocks. The fortunes of these companies,
which include such industries as airlines, home build-
ers and chemical companies, tend to rise and fall withthe economy, prospering when the economy is on the
uoswing and suffering in recessions.
Small-company stocks. Shares in stocks of small
companies are riskier than blue-chip or income stocks.
As a group, their long-term average returns have been
h gh, but those long-term returns come at a price:
short-term volatility.
Foreign stocks. Adding a dash of international flavor
to your retirement portfolio through foreign-stock
mutual funds can increase its diversification and re-
turns because international markets tend to perform
differently than the U.S. stock market. Foreign stocksare subdivided into developed markets, which are es-
tablished and less risky, and emerging markets, which
are faster-growing and more volatile.
Bonds. A bond is an IOU issued by a corporation or
a government. When you buy a bond, you are making
a loan to the issuer. In return, the company or govern-
ment agrees to pay you a fixed amount of interest,
usually twice a year, until the bond matures. At that
point, you are paid the bond's face value. For example,
let's say you buy a $10,000 bond with a 4% interest
rate (called the coupon rate). Each year, you would re-
ceive $400 in interest, in two, $200 installments and,
at maturity, you'd get back your $10,000. You can sell
the bond to another investor before it matures.
But bonds aren't without risk-mainly from interest
rates. The bond market thrives when interest rates
fall. For example, a bond paying 5% interest that was
issued last year will be more valuable today if new
bonds are paying only 4%. So if you paid $1,000 for
your bond, you could probably sell it at a premium. For
example, your $1,000 bond might be worth $1,250 to
another investor. That's because an investor would
have to invest $1,250 at 4% to earn as much interest
as you're earning on your $1,000 investment at 5%.
But the reverse is also true. When interest rates rise,
bond values drop. You could lose money if you had to
sell lower-yielding bonds. For example, if you bought
a 30-year bond yielding 5% and new bonds jumped to
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Kiplinger's Personal Finance. Maximize Your Retirement Investments, pamphlet, 2010; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth639278/m1/7/: accessed July 17, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu.; crediting UNT Libraries Government Documents Department.