How can you make sound investment decisions when you don’t know investment basics? How can you pick investments that are appropriate for your circumstances when you don’t know what your basic alternatives are? Relax, I’m going to simplify the big picture for you.
In my mind’s eye, I place all of the investments in the world into one of four categories, commonly called asset classes. Let’s say you inherit $100,000 and you want to invest it, but you do not understand investment basics. How do you start your search for the best investment(s) for you? Start here, by first narrowing your choices down to four.
CASH EQUIVALENTS and FIXED ACCOUNTS…for money you need to be safe. If you need ready access to your money put it into cash equivalents, commonly called just CASH in the investment business. Examples include bank savings accounts, T-bills, and money market mutual funds. These investments offer high liquidity, and pay interest. You can get your money back quickly and easily, without penalties for early withdrawal.
If you want to earn a higher interest rate and do not need super liquidity, look into fixed accounts. These are also safe investments, but may have penalties for early withdrawal. Examples include bank CD’s, U.S. Savings Bonds, and fixed annuities.
BONDS…if you want to earn higher interest income than you can get in cash or fixed accounts. The value of a bond investment will fluctuate, so there is risk here. Examples include U.S. treasury bonds (not to be confused with savings bonds), corporate bonds, and municipal bonds. Bond mutual funds are available to fit most any bond investor’s needs. By investing in them you own part of a professionally managed portfolio of bonds.
STOCKS…for growth. If you are willing to accept risk in search of higher investment returns, stocks, commonly called EQUITIES, deserve your attention. Average investors basically make money in stocks two ways: through price appreciation, and from dividends. In other words, stock prices can go up, and many stocks pay income in the form of dividends. If you invest in equities be sure to diversify, don’t put all your eggs in one basket. You can pick your own stocks, or you can get instant diversification by simply buying equity mutual funds.
COUNTERBALANCE INVESTMENTS…for growth and to offset loses in stocks, and perhaps bonds. I view this fourth category as a broad asset class. Included here would be tangibles like real estate, gold and silver, and other commodities. In times of rising inflation, for example, bonds and stocks can both be losers. Smart investors keep an eye open for assets that benefit from rising prices.
Basic materials like iron, copper and aluminum fall into this last category, as do natural resources like minerals and oil. There are various ways to invest and keep it simple here. For example, you don’t need to select, buy, and manage real estate properties to profit from rising real estate values. You can simply buy real estate stocks or mutual funds that invest in equity REIT’s (real estate investment trusts). If the price of oil is going up, you can profit from buying oil stocks or mutual funds that invest in them.
If you want to be a long term investor with a well balanced portfolio, give consideration to all four of the asset classes just discussed.
There you have it…all of the investments in the world in a nut shell. With these investment basics in mind, it’s only a matter of getting specific within each asset class. Notice that there are mutual funds to fit your needs in all four investment categories.
By: James Leitz
About the Author:
In my mind’s eye, I place all of the investments in the world into one of four categories, commonly called asset classes. Let’s say you inherit $100,000 and you want to invest it, but you do not understand investment basics. How do you start your search for the best investment(s) for you? Start here, by first narrowing your choices down to four.
CASH EQUIVALENTS and FIXED ACCOUNTS…for money you need to be safe. If you need ready access to your money put it into cash equivalents, commonly called just CASH in the investment business. Examples include bank savings accounts, T-bills, and money market mutual funds. These investments offer high liquidity, and pay interest. You can get your money back quickly and easily, without penalties for early withdrawal.
If you want to earn a higher interest rate and do not need super liquidity, look into fixed accounts. These are also safe investments, but may have penalties for early withdrawal. Examples include bank CD’s, U.S. Savings Bonds, and fixed annuities.
BONDS…if you want to earn higher interest income than you can get in cash or fixed accounts. The value of a bond investment will fluctuate, so there is risk here. Examples include U.S. treasury bonds (not to be confused with savings bonds), corporate bonds, and municipal bonds. Bond mutual funds are available to fit most any bond investor’s needs. By investing in them you own part of a professionally managed portfolio of bonds.
STOCKS…for growth. If you are willing to accept risk in search of higher investment returns, stocks, commonly called EQUITIES, deserve your attention. Average investors basically make money in stocks two ways: through price appreciation, and from dividends. In other words, stock prices can go up, and many stocks pay income in the form of dividends. If you invest in equities be sure to diversify, don’t put all your eggs in one basket. You can pick your own stocks, or you can get instant diversification by simply buying equity mutual funds.
COUNTERBALANCE INVESTMENTS…for growth and to offset loses in stocks, and perhaps bonds. I view this fourth category as a broad asset class. Included here would be tangibles like real estate, gold and silver, and other commodities. In times of rising inflation, for example, bonds and stocks can both be losers. Smart investors keep an eye open for assets that benefit from rising prices.
Basic materials like iron, copper and aluminum fall into this last category, as do natural resources like minerals and oil. There are various ways to invest and keep it simple here. For example, you don’t need to select, buy, and manage real estate properties to profit from rising real estate values. You can simply buy real estate stocks or mutual funds that invest in equity REIT’s (real estate investment trusts). If the price of oil is going up, you can profit from buying oil stocks or mutual funds that invest in them.
If you want to be a long term investor with a well balanced portfolio, give consideration to all four of the asset classes just discussed.
There you have it…all of the investments in the world in a nut shell. With these investment basics in mind, it’s only a matter of getting specific within each asset class. Notice that there are mutual funds to fit your needs in all four investment categories.
By: James Leitz
About the Author:
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com