There are thousands of investments competing for the investor’s attention and dollars. The broadcast and print media are awash with advertisements for the latest, highest rated, “best performing” investment which an investor “must have” if he is to prosper or survive the next cycle or financial disaster.

To help you understand which investments might be appropriate and helpful in meeting your financial objectives, let’s group investments into several categories for easier evaluation.

All investment products can be categorized into a few basic asset classes. Investments fall into one of these primary asset classes:

• Equities - stocks.
• Fixed-income - bonds and other fixed payment securities.
• Cash equivalents - static dollar value: no fluctuation in absolute dollars.

There are 2 additional classes of assets which don’t fit into the basic classes:

• Commodities - agricultural, minerals (gold, silver), basic consumables.
• Real Estate - commercial and residential.

Due to the potential for price volatility, these last 2 additional classes of assets, should only be included in the portfolios of investors with an aggressive risk tolerance and an ability to monitor these investments on a daily or frequent basis.

A properly diversified portfolio will contain assets from more than one or two asset classes. Using asset allocation among the classes helps an investor achieve diversification and portfolio stability. With annual rebalancing of portfolio assets, investors will also take advantage of selling in an asset class that has advanced and buying assets in a class that has declined, thus enforcing the discipline to sell high and buy low.

Within each asset class, thousands of financial products and securities are available. Among the more common are:

• Equities –
  • Stocks
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
• Fixed-income –
  • Bonds, notes and bills

    ›	Corporate issuers
    ›	United States Government, foreign governments
    ›	Municipalities, states, government agencies

  • Mutual Funds
  • Exchange Traded Funds
  • Unit Investment Trusts
  • Fixed Annuities
• Cash Equivalents
  • Money Market accounts
  • Certificates of deposit
  • Savings and checking accounts
  • Short-term (30-day) fixed-income securities
  • Cash Equivalents
• Commodities
• Various agricultural commodities
• Metals: gold, silver, copper, etc.
• Commodity funds
• Hedge funds
• Real Estate
  • REITs – Real Estate Investment Trusts
  • Commercial real estate
  • Residential real estate

Action-steps:

1. Review the characteristics of each asset class.
2. List the asset classes that will help you achieve your investment objectives.
3. Make a list of mutual funds and ETFs which fit into one asset class.
4. Make a list of the mutual funds and ETFs that use different asset classes to provide diversification (Balanced funds).
5. Using your risk tolerance and years until retirement, determine an asset allocation for your portfolio.

Review Chapter 7 in Investing for Retirement - Surviving a Financial Tsunami for information about asset classes, allocation, mutual funds, ETFs, and selecting investments for your portfolio.