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Here is a list of the different types of investment
accounts, followed by a discussion of where you
should have your money based on your
investments goals, time horizon and risk
aversion.


Money Market:
these products are similar to a
savings account, where your money earns a
fixed or variable rate of interest, but where the
principal or initial amount deposit is not subject
to loss or variance. These are typically where
you want to keep funds that you may need in the
short term, over the next one to six months for
example. They will typically pay higher interest
than a savings account and with no payout
restrictions.

CDs: Certificates of Deposit. These are similar to
Money Market accounts, but with a fixed interest
rate and typically with a fixed required term.
Penalty fees or lost interest may apply if the
funds are withdrawn prior to the agreed payout
date. However, these accounts will typically pay
more interest than savings accounts or Money
Markets accounts.

Stocks (Equities): A stock is a form of ownership
of a company, typically a publicly traded one.
One can buy shares of stock, which are the units
of ownership that are sold. These shares will
generally have a traded value that varies
continuously. These shares will most likely be
traded on a public exchange, such as the NYSE
or the NASDAQ.   

Bonds: a bond is a debt instrument of a firm.
This means a company has borrowed money
and has been issued a note which outlines
repayment terms including interest rate and time
period of payback.  An investor purchasing a
share(s) of a bond is entitled to payback of the
principal at some point in the future, although
they will likely sell the share before that time.
They will also be entitled to the periodic interest
payments, known as coupon payments. For
some bonds, the interest is not paid until the end
of the term. Bonds are sold and traded among
the public and public institutions. These are also
often traded on public exchanges.

The price of a bond can and usually does
fluctuate, even though there is generally a fixed
payback amount to be made. Because the
payment amounts are a given, however, the
range of price of a bond is normally much
narrower than that of a share of stock, and so is
considered much safer. Of course, the safety of
any bond is most dependent on the financial
health of the underlying company that issued the
bond. A bond is sort of a hybrid between stock
and a savings account or CD, as one can get
both price appreciation and interest payments –
and with a risk level between the two.         

Real Estate:  this can be an investment in any
piece of property or land. It may be one's own
home, or may be an individually owned
investment property or securities (stock) that are
backed by real estate. An investment in real
estate is a good way to diversify one's overall
portfolio, although it should never be too large a
part of it.

Real estate, in terms of home ownership and
direct investment will be dealt with in the
Real
Estate section.

Mutual Funds:  a fund that combines the monies
of many investors and, in turn, invests them in
many stocks is called a mutual fund. We've
referred before to purchasing stocks or bonds.
Mutual funds are a convenient and inexpensive
way to do it. These funds usually employ
professional stock analysts and portfolio
managers to select and trade stocks into and out
of the fund. Another advantages is
diversification. Diversification is the selecting of
many stocks such that the overall return
produces an average return for the group, while
averaging away many of the extreme returns,
positive or negative. In other words, it reduces
the risk of the overall investment. And it does not
require the individual to buy many stocks to
achieve it. It may save the individual on
transaction (brokerage) fees over time as well.

Mutual funds can come in many different types,
often centered around particular classes of
securities. For instance, one stock mutual fund
may concentrate on growth stocks, another may
invest in only stocks that provide steady income
(dividends). Another may contain only certain
types of bonds.  

One can invest in these types of funds directly or
through a
retirement plan, which is discussed in
a separate section on this site.  

Commodities: a commodity, in the investment  
sense, is any store of value that is publicly
traded - natural resources such as gold or silver,
livestock, currencies, and others. These are
generally traded in futures contracts on one of a
few public exchanges.  I wouldn't recommend
commodity trading for non-professionals, but
there are also commodity based mutual funds
that might be worthy of consideration. For most
investors, commodities investing is both a
hedge both against inflation and a general
diversification investment. It helps diversification
since its returns may be relatively uncorrelated
with the returns of other investments, such as
stocks.  


Which type of Investment(s) are right for you?

A big reason to have a preference for one type of
investment vs. another is your age / time horizon
and risk profile.  

Age / Time Horizon: This is the amount of time
until you would like to cash out your
investments. This can be associated with
retirement or a major purchase such as a home.

Generally speaking, the older you are, the more
conservative your investments should be.
Although all of the investments mentioned have
shown positive returns when measured over
longer periods of time, the value of stock funds
and the like can vary greatly over time. If one is
nearing retirement or some other time of great
cash need, one may not be able to wait until any
downturn reverses itself. For this reason any
investor within 5 to 10 years of retirement or
cash need should shift a high percentage of their
investments toward low risk income stocks,
bonds and fixed interest securities/funds.

On the other hand, someone who is 35 yrs old
and/or with a 30 year time horizon may want to
consider higher growth securities such as
growth stocks and real estate, or a higher
percentage of these types of stocks relative in
his/her portfolio. This person will be able to
withstand many ups and downs of the market,  
enabling him/her to get the highest overall
average return over time.  In the long run stock
funds have almost always outpaced the returns
on any other investments.

Investment Goals and Risk aversion:  Every
person may have a different degree of risk
aversion. This is the ability or willingness to take
risk. Here, it means the willingness to withstand
investment losses.  A person must decide for
him/herself what amount of investment loss,
over what period of time, they are able and
willing to tolerate. Those who can’t withstand
losses should steer a higher percent of their
investments to safer vehicles, such as bond
funds and fixed interest rate securities – those
with a higher ability to take risk can shift more
toward growth stocks.  One should be more risk
averse the shorter one's time horizon.

Although the highest earning long term
investment approach has always been a
portfolio dominated by growth stocks, one
should not adopt a portfolio position that is
riskier than one can truly be comfortable with.



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