Proper asset allocation will spread your investments and your risk among broad asset categories, such as stocks, bonds, and cash. With diversification, we go one step further and look at how you might spread and position your investments within each of these categories.
If the investor is a youthful 25 years of age, he might consider putting the amount allocated to saving for retirement into stocks. On the other hand, if saving for a home to be purchased in just a few years is his goal, cash instruments would be the better option. Of course, the investor needs to be aware that these two categories, stocks and cash, offer many sub-types from which to choose.
Cash
Investments in cash and and cash equivalents are the safest kind of investment, and often guaranteed. Most often, you cannot end up with less than you originally invest, like a savings account. The more liquid the investment, the lower the return is likely to be. With cash investments, liquidity and fees, along with the length of your investment, are the key factors.
If a two-year certificate of deposit receives all your cash investment allotment, you will undoubtedly double the return of sinking that allotment into a regular savings account. The downside is that you cannot access certificate of deposit funds until the certificate matures, in the above case for two years, without suffering a significant penalty fee. You may have been better off in this case to keep some of your cash more liquid should you need to withdraw a portion of your cash assets. Treasury bills, money market deposit accounts and money market funds are secure investment vehicles that offer varying degrees of return. The fact is with cash investments, the easier and more rapidly you can access the funds, the less will be your return.
Bonds
Bonds are actually instruments of debt: IOUs, as it were, issued by a government, whether municipal, state or federal or possibly by a large corporation. Bonds are similar to cash in that they are a fine way to preserve capital. On the plus side, bonds can earn income, serve to balance the risk of stock investments and manage tax liabilities. The price of a bond will fall when interest rates rise, but that is okay because the interest rate from your money market funds go up. Bond issuers may possibly default, but this is a somewhat rare occurrence for most bonds. Also, be aware that bonds can be very difficult to sell off during periods of falling interest rates.
Buying bonds from different issuers with different maturity rates can diversify your bond investments. You need a goodly amount of money to invest if bonds are your thing, as you need at least $10,000 - Treasury securities are in increments of $1,000 and the corporate and municipal bonds are often in increments of $5,000 plus. If you have a lesser amount than $10,000, you may want to look at a bond mutual fund that is already diversified for you.
Stocks
Over a period of years, stocks have proven to deliver the highest return of any asset category, they also provide the highest level of risk. As with baseball, you can hit a grand slam or strike out the first time you are up to bat. But for the entire season, as in baseball, or over an entire career, most stocks that hit it big will generate positive results. Because of this, stocks are the most suitable for long-term investments that are capable of riding out the storms than for short-term savings that are more liquid and can be drawn upon with impunity when needed.
Stocks portfolios are typically by buying across various business sectors, such as financial, media, transportation, and entertainment. Care should be taken to ensure that sectors chosen do not all rise and fall based on the same indicators. For instance, automobiles and air travel both decline when the economy is sluggish, but so do restaurants and other industries that depend on consumers' discretionary dollars. Movies tend to do well in hard times, as do essentials such as food and clothing.
Mutual funds can also be a good way to avoid the highs and lows of individual stocks by averaging your gains and losses across many companies or industries.
If the investor is a youthful 25 years of age, he might consider putting the amount allocated to saving for retirement into stocks. On the other hand, if saving for a home to be purchased in just a few years is his goal, cash instruments would be the better option. Of course, the investor needs to be aware that these two categories, stocks and cash, offer many sub-types from which to choose.
Cash
Investments in cash and and cash equivalents are the safest kind of investment, and often guaranteed. Most often, you cannot end up with less than you originally invest, like a savings account. The more liquid the investment, the lower the return is likely to be. With cash investments, liquidity and fees, along with the length of your investment, are the key factors.
If a two-year certificate of deposit receives all your cash investment allotment, you will undoubtedly double the return of sinking that allotment into a regular savings account. The downside is that you cannot access certificate of deposit funds until the certificate matures, in the above case for two years, without suffering a significant penalty fee. You may have been better off in this case to keep some of your cash more liquid should you need to withdraw a portion of your cash assets. Treasury bills, money market deposit accounts and money market funds are secure investment vehicles that offer varying degrees of return. The fact is with cash investments, the easier and more rapidly you can access the funds, the less will be your return.
Bonds
Bonds are actually instruments of debt: IOUs, as it were, issued by a government, whether municipal, state or federal or possibly by a large corporation. Bonds are similar to cash in that they are a fine way to preserve capital. On the plus side, bonds can earn income, serve to balance the risk of stock investments and manage tax liabilities. The price of a bond will fall when interest rates rise, but that is okay because the interest rate from your money market funds go up. Bond issuers may possibly default, but this is a somewhat rare occurrence for most bonds. Also, be aware that bonds can be very difficult to sell off during periods of falling interest rates.
Buying bonds from different issuers with different maturity rates can diversify your bond investments. You need a goodly amount of money to invest if bonds are your thing, as you need at least $10,000 - Treasury securities are in increments of $1,000 and the corporate and municipal bonds are often in increments of $5,000 plus. If you have a lesser amount than $10,000, you may want to look at a bond mutual fund that is already diversified for you.
Stocks
Over a period of years, stocks have proven to deliver the highest return of any asset category, they also provide the highest level of risk. As with baseball, you can hit a grand slam or strike out the first time you are up to bat. But for the entire season, as in baseball, or over an entire career, most stocks that hit it big will generate positive results. Because of this, stocks are the most suitable for long-term investments that are capable of riding out the storms than for short-term savings that are more liquid and can be drawn upon with impunity when needed.
Stocks portfolios are typically by buying across various business sectors, such as financial, media, transportation, and entertainment. Care should be taken to ensure that sectors chosen do not all rise and fall based on the same indicators. For instance, automobiles and air travel both decline when the economy is sluggish, but so do restaurants and other industries that depend on consumers' discretionary dollars. Movies tend to do well in hard times, as do essentials such as food and clothing.
Mutual funds can also be a good way to avoid the highs and lows of individual stocks by averaging your gains and losses across many companies or industries.
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If you are in the Ann Arbor area please visit Kennard Wealth for help with Ann Arbor long term care insurance, Ann Arbor retirement planning, and other related topics.
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