Consult with your financial advisor and your tax advisor to discuss these concepts and approaches before you make any investment decisions. This information is for educational purposes only and should not be the sole basis for changing your portfolio strategy.
Cash is your opportunity money and is the safest investment in your portfolio. It is the "Swiss Army Knife" or "Transformer" in your portfolio. It can cover an unexpected expense. It can buy an unexpected bond or stock investment if it goes "on sale". Cash is NOT an investment and the interest you earn on it will not cover inflation or taxes. That is what your bond and stock investments will address.
Bonds are your income investments. They are not as safe as cash but safer than stocks. Bonds are debt instruments that are designed to pay dividends. They have all kinds of conditions and maturities. Using bond funds help the investor reduce the complexity of these options by outsourcing those decisions to a professional portfolio manager. There are four basic types of bonds.
Each bond type has advantages and disadvantages so building a portfolio with all the bond types help spread bond risks for the individual investor.
Stocks are your growth investments. They are higher in risk than bonds or cash. Stocks are equity investments (you own part of the company) and they are designed to provide growth and sometimes dividend income to your portfolio. They are your best weapon against the two enemies of your wealth, inflation and taxes.
Alternatives are your hedge and growth investments. They include real estate, commodities, precious metals, collectibles, and other specialized investments.
There are many sub-categories of cash | bonds | stocks | alternatives. Many pension plan managers will actively develop and maintain over 20 distinctly different asset classes to maintain their risk management strategy. It is designed to protect the pension portfolio that generates the monthly income for the pension participants. The most common examples of this are in the stock classifications. There are large | medium | small cap (capitalization) stocks that are measured in billions of dollars of their company value. There are also growth | blend | value stock classifications as well.
I will be adding additional content to explain these differences in Q4 2014.
Do your homework and understand how each of these asset classes work. Go to Investopedia.com and use the dictionary there that is available at that website.
The best buy and sell advice I can offer you is this:
The best portfolio risk metric advice I can offer you is this:
Do your homework and understand how each of these risk metrics work. Go to Investopedia.com and use the dictionary there that is available at that website.
Next quarter I will add some information about open ended mutual funds | closed ended mutual funds | Exchange Traded Funds.