As with many things in life, getting started with an investment program is often the most difficult step. With so many options, deciding which investments are best for you may seem like a daunting challenge. Selecting the right investment program requires an understanding of your investment choices, how different types of investments generally perform over long periods of time, your financial goals and your risk tolerance.
Your primary investment choices can be broken down into three general asset categories:
- Stocks or Equity Securities
- Bonds or Fixed Income Securities
- Cash Equivalents
Though each may play a role in your investment strategy, creating the ideal investment mix involves identifying your personal objectives and risk tolerance and then choosing your investments accordingly.
Stocks or Equity Securities
Investing in equity securities buys you a piece of ownership in a company through shares. Your share of ownership is known as equity. Equity values may fluctuate and have more risk in the short term, but over the long term, equity investments have historically provided significantly higher returns than either bonds (fixed-income securities) or cash equivalents. Always remember that past performance is no guarantee of future results.
Bonds or Fixed Income Instruments
Bonds, or fixed income securities, are certificates of debt issued by corporations and by governmental entities when they borrow money. Here are a few examples of the types of bonds:
- Government Bonds
- Municipal Bonds
- Corporate Bonds
While corporate bonds are considered higher yielding, fixed income securities because of their increased credit risk, other debt securities generally carry less market risk and offer lower returns than equity securities. Bond values go up or down as a result of changes in interest rates. When interest rates drop, bond prices tend to climb; when interest rates rise, bond prices often fall.
Cash Equivalents
Cash equivalents are short-term investments that are easily converted to cash. They include:
- Money market investments
- Bank certificates of deposit (CDs)
- U.S. Treasury bills (T-bills)
One objective of cash equivalents is to protect your investment. Their values do not fluctuate as much as equity or fixed income securities. The low market risk of these investments, however, comes at a price: Cash-equivalents generally have lower rates of return than debt or equity securities. For this reason, cash equivalent securities are often used for emergency funds or to park money for the short term.
Talk to an agent or advisor for more detailed information on your investment choices.
Securities are subject to market risks, including the potential loss of principal invested.
An investment in the portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio.
