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Tuesday, July 22, 2008

Types of Investments


From The Hoss's Mouth


This issue of Hoss Cents Free Financial Money Magazine is about types of investments. Investments, like race horses, come in all shapes and sizes.

  • Cash or Cash Equivalents: These investments offer easy access to your money, are low risk and usually offer a low rate of return compared to other investment types. Examples are savings bonds and treasury bills.

money magazine
  • Fixed Income Securities: You are lending your money out for a longer period of time than with cash or cash equivalents so they usually offer better rates, but due to the length of time, they are somewhat more risky. Most come with guarantees and are relatively safe. High rate of return "junk bonds" or their equivalents offer no guarantees and are a high risk type of investment.
  • Equities: Equities are stocks. The purchase of a company's stock means you are a part owner of that company and may receive dividends. You may also profit when the stock value increases. Equities can produce high rates of returns, but there is a risk of losing some or all of your investment.

mutual funds
  • Mutual Funds: You pool your money with other investors to buy units of an investment fund which has investments in one or more asset class. This enables you to purchase a variety of investments that are managed by a professional manager, for a minimum cost.
  • Alternative Investments: These include, but are not limited to, call or put options, futures, income trusts and hedge funds. In exchange for higher than average return potential, you have higher than average risks with these types of investments.

In order to determine what type of investment is best suited to you and your needs, you (if you decide you do not need the services of a financial adviser) or you and your financial adviser must fully understand what your goals are and how much risk you are prepared to take to achieve those goals. Mrs. Hoss has a simple handicapping method for telling her husband, The Hoss, that he has over ran his risk tolerance level: If The Hoss is unable to sleep at night because he is worried about his investments, then his investments have out paced his risk tolerance.

A word of caution from The Hoss. If you are looking for a high return, risk-free investment type, forget it. There is no such animal, and don't let anyone convince you otherwise. The Hoss implores you to remember this basic rule of investment: The greater the risk, the greater the potential of a high return and the greater the potential for a loss.

In the posts to come, The Hoss will explain each of the above types of investment in greater detail.

Stay on track,

The Hoss

Next Hoss Cents Money Magazine Post: Cash Investments

Previous Post: Working With Your Financial Adviser

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