Cash Investments

From The Hoss's Mouth

This issue of Hoss Cents Free Financial Money Magazine is about cash investments. Investing in cash or cash equivalents is like betting on the favorite in a race. It gives you your best odds on making a profit, but provides a relatively low rate of return compared to other types of investments. The Hoss will get his binoculars out and take a close look at each of the various types of cash investments.

• Interest Yielding Bank Account: Very low risk and a very low rate of return. Provides easy access to your money.

• Savings Bond: A loan you make to the government, usually for a period of a year or more. They can be purchased from banks, credit unions, trust companies and investment dealers. They usually provide a fixed rate of return for each year to maturity. However, some have a variable rate of return dependent on market conditions, and they have a minimum guaranteed rate. Cashability varies, as some must be held to maturity, others can be redeemed at predetermined intervals, and some allow redemption at any time. Savings bonds are guaranteed by the issuing government; and given their taxation powers, there is little or no risk of default. A relatively safe cash investment.

• Treasury Bill (T-Bill): A short-term loan (less than a year) you make to the government. They are sold by investment dealers and come in large denominations. You buy T-Bills for less than their maturity value. The difference between your cost and the value at maturity is your profit, or if you prefer, interest. As with savings bonds, there is little or no risk of default. Although T-Bills are not redeemable before maturity, they can be sold back to the investment dealer, but this will mean a lower rate of return for you.

• Guaranteed Investment Certificate (GIC): A financial institution's certificate of deposit. GIC investment terms usually range from 30 days to 10 years and are sold by banks, credit unions and trust companies. Most provide a fixed rate of return to maturity, but some are based on the performance of a stock market index. This type of GIC provides an opportunity for higher interest, but also could result in little or no profit at all. In most cases, the issuer guarantees the GIC, and an insurance agency, such as the Canada Deposit Insurance Corporation, may insure the principal up to a certain limit. Consequently, it is unlikely (but not impossible) that you will lose the principal on this cash investment.

• Money Market Fund: Available only as a mutual fund, and as such, must be purchased through registered dealers. You may wonder why The Hoss chose to list a mutual fund in the Cash or Cash equivalent grouping. Simply put, it's because Money Market Funds invest in short-term fixed income securities and are usually redeemable at any time. The Hoss will provide in-depth information about Mutual Funds in a later post.

This completes today's issue about cash investments. It's time for The Hoss to put the binoculars away and return to the barn for some oats.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Fixed Income Securities

Previous Post: Types of Investments

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.

• 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: 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