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

Choosing a Financial Adviser

From The Hoss's Mouth

Your financial adviser must fit you as perfectly as a horse shoe fits a horse's hoof. This is essential if you are to win the race for financial freedom.

Your choice of a financial adviser depends on your financial knowledge and investment experience:

Do you need help with your family's financial matters - i.e. retirement planning, setting goals and paying less taxes?

Do you have investment experience? If not, you will want an financial adviser to provide you with assistance in selecting the proper investment product for your needs. If you are an experienced investor, choose an adviser who offers a wide selection of investments and discusses the benefits and shortcomings of each.

The Hoss strongly recommends that you choose a financial adviser who is registered with a securities regulator. This provides you with added protection, as only properly qualified firms and individuals can obtain registration.

In order to come up with a list of potential candidates, The Hoss suggests you speak with co-workers, family, friends or any other person you trust for their recommendations.

In addition, you can locate registered financial advisers from a variety of sources:

• banks

• investment firms

• brokerage firms

• online

You might want to make initial contact by phone. This can save a lot of time by eliminating those financial advisers who are not accepting new clients or are not suited to your basic needs.

Once you have come up with a short list, arrange to meet with each one of them in their office. You wouldn't expect a horse to run a race without a warm-up, nor should you approach an interview of this importance without thorough preparation. Ten questions you should ask your potential financial adviser:

1. What are your qualifications and education?
2. Do you have references?
3. Is your company registered with a securities regulator?
4. Are you personally registered with a securities regulator?
5. How long has your company been in business?
6. How long have you been a financial adviser?
7. What is your area of expertise?
8. What type of investment products do you offer?
9. Will these products help me obtain my goals?
10. How do you get paid?

Do not hesitate to add your own questions to ask your potential financial adviser. (Sidebar: If you would like to add to this list of questions to ask, fill in the comments form below so The Hoss can include them.)

Do not be surprised, in fact you should expect, questions from the potential candidate. S/he should ask you what your goals are, what your investment experience is, and what your risk tolerance is. If these questions are not asked of you, gallop, don't trot, to the next candidate.

While in their office, check out the surroundings, as this will give you some indication as to how they conduct business. Also, take note of how well the financial adviser listens to and responds to your questions. Did you feel completely at ease discussing your financial situation with him/her? If not, again gallop, don't trot to the next candidate.

When you have completed all your interviews, and before making a final selection, contact the securities regulator in your area and confirm the potential candidate and his/her firm are registered and have no record of any disciplinary action.

That's enough for today. This post is more like a route race than a sprint, but it is an important topic.

Stay on track,

The Hoss

Previous Post: Beginner Investing

Next Hoss Cents Money Magazine Post: Working with Your Financial Adviser

Beginner Investing

From the Hoss's Mouth

Beginner Investing

Investing, in The Hoss's opinion, should not be considered unless or until you have:

• Eliminated debt or the debt you have is classified as good debt
  

• You and your family have established financial priorities

• Have set up a budget which provides funds for investing

Remember that old cliché: Don’t put the cart before the horse." That is exactly what you would be doing if you start investing before you have successfully completed the above steps.

If you have been reading this blog faithfully, you have already decided what you want to accomplish with your money. Now it's time to refer to your short, intermediate and long term goal lists that you established when setting your financial priorities, and decide on a beginner investing program which will assist you to achieve these financial goals. Increasing your wealth is like building a house; you start with a proper foundation. After the foundation is set, you can expand your investments.

The Hoss understands that the world of investing is indeed complex and foreign to many people. The mere though of comparing stocks, bonds, mutual funds, term deposits and the like can be as difficult as understanding the daily racing form. If you do not understand your investment choices, there are many financial advisors available to assist you with these tough decisions. My next blog will provide information that will aid you in selecting a financial advisor.

You, and/or you and your financial advisor ,will have many things to consider when creating your personal beginner investment plan:

• How much money is available for investing?

• What is your tolerance for risk: high, medium or low?

• Which investment products best suit your risk tolerance level?

• What do you know about the stock markets?

• How familiar are you with mutual funds?

• What asset mix will best achieve your financial goals?

• Will your employment income remain constant or is it subject to change?

• What is your investment time horizon?

The Hoss reminds you that you, and/or you and your financial advisor, must monitor your investment portfolio on a regular basis. When required, make adjustments to keep your portfolio in line with your beginner investment objectives.

Future posts of this blog will contain detailed information on stocks, bonds and mutual funds; what they are and how to purchase them.

Stay on track,

The Hoss

Previous Post: Banking and Finance

The next Hoss Cents Free Financial Money Magazine post: Choosing a Financial Advisor