If you haven’t started an investment program, there is no time like the present. However, understanding basic investment categories is key to being successful and building a diversified portfolio. The three basic categories are cash, stocks, and bonds. You can invest in individual investments in each of these categories or you can invest in a mutual fund which represents a grouping of one or a combination of these three investments depending on the fund’s objective. For example, money market funds are groups of cash investments; growth funds are primarily stocks; income funds are mostly bonds; and balanced funds may have some of each. A diversified portfolio includes a mix of all three investment categories and the percentages you choose from each category should be based on your goals, the amount of time you have before you need the money, and your risk tolerance level.
Cash: Cash investments typically can be accessed quickly with little or no loss of principal. They add liquidity and stability to your portfolio. Examples include money market accounts and funds as well as CDs, and Treasury bills.
Stocks: Stocks represent equity or ownership in a company. You can purchase individual shares of stock in a company and become a part-owner or a stockholder, or you can purchase a stock mutual fund that may own shares in many different companies. Stocks may be classified by the size and/or type of company. Examples include: small cap stocks (companies with an aggregate value of less than $1 billion); blue chip stocks (companies that are well established and have been around for a long time like Coca Cola); and sector stocks (companies classified according to the type of business they represent such as technology or health care); While some stocks pay dividends, the real way you make money with stocks is by selling them for more than you paid for them. Stocks add growth potential to your portfolio and protection against inflation. They have historically outperformed both cash and bond investments by a wide margin.
Bonds: Bonds are the equivalent of an IOU because when you buy bonds, you are loaning money to the government or a corporation. In return for your loan, you receive a fixed rate of interest, usually paid twice a year and when your bond matures, you get your original investment back. Bonds are rated based on the creditworthiness of the issuer. The lower the rating, the higher the return bondholders expect because they are taking on more risk. Like stocks, bonds may be purchased separately or in mutual funds. Examples include: Treasury bonds issued by the Federal government; municipal or ‘munis’ issued by states and local agencies; and investment grade and high yield bonds (junk bonds) issued by corporations. Bonds add current income to your portfolio through the interest payments you receive.
Even though these are just brief descriptions of the basic types of investments, they provide you with basics to start investing. Keep in mind that you don’t need to know everything to get started and there really is no time like the present to get started. Continue to educate yourself and remember, experience is one of the best teachers. Let me know where you decide to start and how its going. ps!