I remember once, long ago, when I had started teaching continuing education classes, I finished a class that I felt had gone particularly well. I was so proud of what a great job I had done.
Then one of the students asked me a question. “So, should I invest in an IRA or in a CD?”
Uh-oh. Maybe I didn’t do such a great job after all.
Of course, you can invest in CDs inside an IRA. A CD, certificate of deposit, is something that you get at a bank that locks up your money and pays a steady interest rate. An IRA, individual retirement account, is, as its name suggests, a type of account. You can put all sorts of things inside your individual retirement account, including CDs, mutual funds, individual stocks and bonds, even real estate.
What’s important about a CD is what type of investment it is. What’s important about an IRA is how it affects the way your investments are taxed.
But a lot of investors use short-hand for everything. So for instance, they’ll say they have “Fidelity, and it’s been doing well.” Or they’ll talk about their Roth IRA as if it were an investment category when it is actually a type of account.
So let’s do a short breakdown.
First of all, there is the type of investment. Stocks and bonds, CDs and real estate, commodities and currencies, and mixes of the above. These are the basic types of investments, and your portfolio’s performance will largely be determined by the extent to which you invest in one or the other.
Second, there is the vehicle you use to invest. You may want stocks, bonds, real estate and commodities, but how are you going to access those investments? Vehicles include mutual funds, exchange-traded funds, real estate investment trusts and a category I advise staying away from, hedge funds.
You also have your custodian. Your custodian is like the bank that holds your investments and investment vehicles. You also have a broker, which is the company that carries out any trades.
Now here is where it gets confusing. You might have Fidelity as a custodian. You might also have them as a mutual fund company. You might even have individual stock in a company called Fidelity (which is a different Fidelity). So if someone just talks about how “their Fidelity” is doing, you really don’t know what they are referring to.
It’s a good idea, if you find this confusing, to sift through your investment materials and try to figure out who is the mutual fund company, who is the custodian, and if you have one, who is the adviser.
Finally you have the type of account. It could be a 401k, an IRA, a Roth IRA, or just a regular old custodial account at a custodian. Each type of account has certain kinds of limitations, but the important thing about your accounts for you, the investor, is always what kind of tax treatment the accounts get.
Your vehicle can hold any sort of investment. You can keep your vehicles at any custodian. And your account can contain any investment, in any vehicle, held at any custodian. That’s another way of thinking about things.
So hopefully this clears things up a little bit. Remember, keep investing simple and stay the course.