The Retirement Corporation of America

Another Investment You Should Know About

YOU SHOULD KNOW about mutual funds that look like common stocks and have strange names, such as Spiders, Cubes, and Diamonds. They are "exchange-traded funds" (ETFs)—mutual-fund-like vehicles that trade on the exchange just like common stocks.

The creators of an ETF put together a basket of securities, much as a portfolio manager would do with a mutual fund. ETFs are more closely aligned with index funds than with the average mutual fund, since each is built around a specific stock market index, or around a specific category of stocks. Here's how the field lines up:

•  Spiders (SPDRs, for Standard & Poor's Depositary Receipts): The original SPDR tracked the S&P 500. Now there are a dozen SPDRs, each tracking a different industry or category of stock (S&P mid-cap stocks, basic industry stocks, technology stocks, utility stocks, etc.). Each has its own ticker symbol—SPY for the S&P 500, XLK for the technology fund. All trade on the American Stock Exchange.

•  Diamonds: They're ETFs pegged to the Dow Jones industrial average. They trade on the American Stock Exchange under the ticker symbol DIA.

•  Cubes: The fund tracks the 100 largest stocks that trade on the Nasdaq market. The fund itself trades on the American Stock Exchange, under the ticker symbol QQQ—hence cubes.

•  iShares: There are more than 50 iShares covering both the U.S. and foreign markets. There are iShares for most major market sectors, from biotechnology (symbol IBB) to telecommunications (symbol IYZ). Plus, there are iShares for each stock market around the world, from Australia to Belgium and all stops in between. They trade on the American Stock Exchange and have their own ticker symbols.

•  Vipers: These are ETFs from Vanguard, the giant mutual fund company.

So that's what ETFs are all about: index mutual funds that have been issued in the form of common stock, that trade on the stock exchange just as the shares of Coca-Cola, IBM, or Microsoft do. Any broker, even the online discount brokers, can handle an order for an ETF.

Take This Investment Comfort-Index Quiz

The biggest mistake investors make when saving for retirement is being overly cautious. That's because they fear they don't know enough to make wise investing decisions, or maybe will make the wrong investment and put a huge dent in their retirement savings.

What's your investment comfort index? Do you feel comfortable enough making investment decisions to build a retirement nest egg big enough to sustain you in your later years? Or are you a nervous-Nelly investor, who hesitates to act at all, or who acts with panic and makes the mistakes that panic can cause? Ask yourself these questions, and find out:

Investment Comfort-Index True/False Quiz

1. I'm comfortable making investment decisions for my retirement savings.
2. I know how to learn about a mutual fund by reading its prospectus.
3. I'm seldom surprised by what the stock market does.
4. I'm generally pleased with the investments I've made for my retirement.
5. I spend at least three hours a month thinking about my retirement investments.
6. I know the difference between a growth investment and a value investment.
7. I know the total return (gains in price plus interest or dividends) for all my investments for the past 12 months.
8.  I know where to find the Net Asset Value (NAV) of every mutual fund I own.
9. I know the yield of every bond, or bond mutual fund, I own.
10. I have a pretty good idea of the risk level of every investment I own.
11. I usually speak up when the discussion, at work or at a party, turns to investments.
12. I make investments because they make sense to me, not because a friend or relative or co-worker told me what to buy.

The more "true" answers, the more confidence you have in your investing ability and the less likely you will e paralyzed into immobility. The more "false" answers, the more you need to bolster your investment comfort level.

Do that by completing this lesson and the other lessons in this program. Keep in mind that you can reduce investment risk by:

•  Allocating your assets among stocks, bonds, and cash.

•  Diversifying your investments, so you dont own just one mutual fund or one stock, but several.

•  Investing for the long term, to allow compounding and the general tendency of the markets to gain over time.