Stocks, bonds, certificate of deposits, money market funds – so many choices. Deciding where to put your money is one reason why so many people delay investing.
One way to manage your financial risk is to diversify your portfolio to include a blend of assets. The International Association for Financial Planning offers some options:
- Guaranteed interest contract provides a fixed interest rate for a set time period. It’s typically backed by a contract that an insurance company issues. This is a low-risk, guaranteed option, but low rates and rising inflation can erode its earning power.
- Company stock should represent only a small portion of your investment portfolio because buying stock in a single company carries a high risk.
- Mutual funds and variable annuities pool money from many investors and invest in various securities such as stocks, bonds and money market instruments. It lets you reduce risk.
- Money market funds typically consist of U.S. Treasury bills, Certificates of Deposit and other commercial investments. These are safe investments but their low reward may not beat long-term inflation.
- Bond funds represent loans to federal or local governments or to a corporation with a promise to repay in a predetermined period at a set interest rate. These are considered safer than stocks, but are sensitive to interest rate fluctuations and may be outpaced by inflation. High-grade bond funds are low to moderate risk, some can be high risk.
- Balanced funds (or asset allocation funds) blend stocks and bonds. They allow for diversification with potentially lower risk than pure stock funds, but the return also is lower.
- Stock index funds attempt to “mirror” the performance of stock market indexes like the S&P 500. Index funds invest in most of the same fund stocks found in the corresponding index and seek to closely match its performance. These are low risk in terms of stock funds.
- Growth and income funds invest in companies with strong growth potential, but that also have a solid record of paying dividends. These are middle-risk options.
- Growth funds try to identify companies whose stock values are expected to increase. They are higher risk. Expect major fluctuation in share price in exchange for a potentially higher return.
- Aggressive growth funds are made up of stocks with above-average growth potential. These may include start-up companies, small companies or those in high-risk industries. They are high risk, with a possible high return.
- International or global equity funds. International funds invest in stocks from countries outside of the United States. Global funds invest in foreign and U.S. companies. Since any number of international issues impact these funds, you take on high risk, but potential rewards also are high.