INVESTMENT BASICS

Small cap, large cap, long bonds, equities, income trusts, mortgage funds, money-market funds, and on, and on. There are thousands of investment choices available to you Å and the list seems to grow day by day. Too often that can lead to confusion and poorly considered Å or mis-understood Å investment selections. It can also cause investment paralysis Å the inability to make any decisions and the consequent loss of income growth because your money just sits in a bank account gathering little or no interest.

While it is true that structuring the right investment and financial plan for your situation can be a complex task, there are certain investment basics that can help you cut through the clutter and make informed decisions about what’s best for you.

The basic types of investments. Generally speaking, there are actually only three basic types of investments: cash, fixed-income and equity. Each has a role to play in a well diversified investment portfolio that fits your risk tolerance and long-term financial goals.

Cash investments include money in bank accounts and other short-term instruments such as Treasury bills and money-market mutual funds. Cash investments are less volatile, but usually offer lower expected returns. They are suitable for the conservative portion of your portfolio and can be a ready source of funds for unexpected financial emergencies, or for times when you know you’ll need access to cash for a large outlay like a house down payment.

Fixed-income investments include bonds, mortgages and bond-mutual funds, Guaranteed Investment Certificates (GICs) and other interest-generating securities. Fixed-income investments generally provide a stream of income while preserving capital if held to maturity. Most are considered low to moderate risk and returns will vary with fluctuations in the general level of interest rates. The exceptions are GICs that guarantee a fixed rate of return.
Equity investments are stocks or mutual funds that invest in stocks or which track stock market indices. These potentially offer the highest returns, but with the greatest level of risk, and are suitable for that portion of the portfolio that can withstand potential losses.

Diversify to manage risk and enhance returns. Asset allocation plays a key role in the long-term health of your investment portfolio. By diversifying your portfolio among and within each of the three types of investments; cash, fixed-income and equities; you’ll help protect your portfolio by reducing the effect of short-term fluctuations (like the poor market performance of the recent past) and enhance its ability to deliver long-term returns. Years of research have repeatedly shown that a long-term, disciplined and diversified approach to investing will ensure your portfolio is always in the right place, regardless of market conditions.

Invest regularly. Effective asset allocation is one key to building and managing your personal wealth. The other is the discipline to invest a fixed amount at regular intervals to capitalize on periodic lows in prices and higher interest rates as they occur.

Your personal asset mix should be determined by your financial goals, your investment timeframe and your tolerance for risk. It should also be adjusted as you move through life; when you’re young, it’s a good idea to concentrate on growth; as you grow older, reducing risk and preserving wealth become more important.

With thousands of investment options to choose from, many investors are uneasy making asset allocations on their own. That’s why it makes good sense to talk to a professional financial advisor about the best investment and financial plan for you.