The One, Two, Three of Investing

From what we’ve seen over the past 20 years, women are more likely to be better investors than men. Here’s why: They tend to research their investments more thoroughly and invest to meet specific long-term goals. They are inclined to hold onto their investments longer than their male counterparts, and panic less easily, even when the markets take a dip.

Although women can make better investors, they often lack investing confidence. If you’re a novice to the world of investing, you may feel insecure about taking that first step, and more than a little overwhelmed. Without guidance, investment possibilities can seem both endless and confusing. But this is only an illusion, because there are really only three major areas in which to invest: cash, real assets and financial assets.

  • Cash includes the money in your wallet and your checking and savings accounts, money market accounts, short-term certificates of deposit, and Treasury bills.
  • Real assets are tangible and include real estate, oil and gas, and antiques.
  • Financial assets fall into two categories: stocks, through which you become a shareholder in a company; and bonds, through which you loan money to a company, government, or municipality.

Every investment fits into these general categories, and your investment portfolio eventually will include holdings in each of these groups.

Cash has a place in every portfolio. But is it possible to have too much cash? Many financial advisors say you should keep three to six months of living expenses available, but that is just a rough rule of thumb. We say you should always have enough on hand to meet unexpected emergencies, and if your employment is in jeopardy or your income is irregular, you should also have enough to pay for several months of living expenses. Many people keep very little cash in savings accounts, and rely instead on credit cards for emergencies. That can be a costly way to feel secure, because that security is bought at the expense of high interest rates if they have to tap those credit lines.

Cash is a wise investment in a volatile economy, or when interest rates are sky high and going higher. Historically, those times are few. During normal economic conditions, cash loses buying power to inflation. To harness the positive power of inflation, you need to diversify your investments by putting some of your money into real and financial assets.

We find that for most people, their first real estate investment is their own home. For many people, it is also their biggest investment. As your wealth grows, you may invest in other real assets as well, such as rental real estate, artwork, antiques, and precious metals. But invest with caution. Real assets have their drawbacks. They can be hard to value, difficult to sell, and costly in terms of commissions. On the plus side, real assets tend to move in a different cycle than securities, so if the stock market is down, your real assets may be increasing in value.  

Financial assets include securities, such as stocks and equity mutual funds, and bonds, including corporate and government bonds. Each of these asset categories plays an important role in your investment strategy, because they tend to perform differently from one another. That means you can minimize the risk to your portfolio by diversifying your holdings, spreading out your money across several types of financial assets, including stocks and bonds. Investing through mutual funds will further diversify your investments, allowing you to own a small part of many different companies through the mutual fund.  

When you buy stock, you are buying a small piece of ownership in the company. As an owner, you have a say in the election of directors and other business conducted at shareholder meetings or by proxy. You are also entitled to dividends, if the company pays out its earnings to shareholders rather than retaining them to grow the company. Some stocks are riskier than others. Blue-chip and dividend-paying stocks are the least risky, whereas small company stocks and growth stocks are among the riskiest.

When you buy bonds, you are lending money to a company, government or municipality. In return, the issuer of the bond promises to pay you a specified amount of interest for a fixed period, and to pay back the principal (the full amount of the loan) on the maturity date. Bonds provide continuing income, but they vary in safety from U.S. Treasury bonds to high-risk junk bonds.

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