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Answer:
Dear
JoAnne,
You're
already on the right track...and that is to invest
in more than one stock, more than one type of asset.
It's called asset allocation.
What
it is...
How
your money is divided among different kinds of investments
is officially called asset allocation. The
asset categories are growth (stocks), fixed income
(bonds) and cash. How much you should have in each
asset or category is determined by the degree of risk
you want to take, your personal wealth, your age and
your financial goals.
Putting
these three together -- stocks, bonds and cash --
in a combination that works specifically for you is
what asset allocation is all about.
Cash...
In
terms of the investment world, cash is not just a
pile of $20 bills. It more specifically refers to
savings accounts, money market funds and bank CDs.
Money market funds invest in very short-term, high
quality, interest paying securities. That makes them
much less volatile than stocks or bonds. On the other
hand, their safety and stability also means a lower
return. Money market funds, unlike banks savings accounts,
are not insured by the FDIC but they pay a higher
rate of interest.
BUYandHOLD
offers three different money market accounts for your
money:
Cash
Trust Series Prime Cash Series (CTPXX)
Cash Trust Series Government Cash Series (CTGXX)
Cash Trust Series Municipal Cash Series (CMSXX)
Click
here to learn more about money market accounts
at BUYandHOLD.
Cash
offers stability and helps you address short-term
needs, is the basis of an emergency nest egg.
Bonds...
A
bond is a type of IOU. When you buy a bond, you become
a lender, loaning money to the issuer. In return,
the issuer owes you the dollar amount shown on the
face of the bond, plus interest. The interest rate
is fixed for the life of the bond. When the bond matures,
you get back the face value, typically $1,000 and
in the interim, you've been collecting interest on
a regular basis.
Bonds
provide a fixed rate of income regardless of market
fluctuations and so can smooth out the ups and downs
of the stock market.
Here
at BUYandHOLD, you can purchase bonds through closed-end
bond funds. Click
HERE for details or click
here to read my previous column on the topic.
Stocks...
Stocks
are the third asset class. Stocks represent ownership
in a company. You can make money with stocks in two
ways: through dividends (if the stock pays a dividend;
not all do) and through price appreciation (if you
sell a stock that's gone up in price since you bought
it).
Stock
prices are volatile because they react to news about
the company's financial well-being and about the economy.
The trade off for price volatility is that stocks
offer greater growth potential than bonds or cash.
Stocks
can be used to meet intermediate and long-term goals.
Why
all three...
The
reason you need money in each of these three categories
is because each performs differently from the other
at the same time. For example, when interest rates
are high, cash assets (money market funds, Treasuries
and bank CDs) offer high yields. That's also the time
when stocks and bond tend to lag.
The
basic premise of asset allocation is that the younger
you are, the more money should be invested in common
stock. However, the biggest asset allocation mistake
made by people over 50 is being too conservative.
Many people in their 60s will live into their 80s
or 90s.
A
rule of thumb...
You
may find this old standby useful...but remember, it's
just a rule of thumb.
Subtract
your age from 100 and use the resulting number as
the minimum percentage to have invested in stocks.
For
example, if you're 55, then you should consider having
at least 45% of your assets in stocks (100 minus 55
= 45).
If
you are seeking maximum growth and are seeking to
meet long-term goals, such as paying for a child's
education or saving for retirement, you might allocate:
75%
in stocks
20% in bonds
5% in cash
A
more conservative allocation would be:
55%
in stocks
40% in bonds
15% in cash
Bottom
Line
There
is no such thing as a perfect asset allocation. The
most important thing it to be aware of how much money
you have in each of the three asset classes, to change
it as life's circumstances change and never, ever
have all your money in one asset.
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