Investments. To meet your financial goals you will need a plan. Part of this plan is to create a portfolio.

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1 Investments To meet your financial goals you will need a plan. Part of this plan is to create a portfolio. This portfolio reflects what type of risk you are willing to accept. Within this portfolio, you will have a collection of investments. These investments contain certain components such as cash, fixed income, growth, and growth and income. You will want to allocate your assets or percentages of your assets to complement each other to maximize potential return and reduce risk. Cash/Cash Equivalents The first component is cash. Cash investments are low risk and have low return, currently 1 to 3 percent. Normally, a conservative investor will take this approach. In addition, if you need to have easy access to your money. Cash investments include saving accounts, certificate of deposit (CD), savings bonds, and money market funds. Saving Accounts are a good tool to place emergency funds. Though they offer low return, your money is accessible. In addition, pay no fees as long as you maintain a minimum balance. CD s are investments that require a certain dollar amount. You can invest as little as $100 or as much as $100,000. CD s also specifies a required period. The interest rate is higher and normally remains fixed for the entire term of deposit. You must be willing to wait the specified time limit otherwise pay a penalty for early withdrawal. Savings bonds are loans to the U.S. government, a safe place to invest cash. Savings bonds will earn interest for 30 years and offer several tax advantages. Linked to mutual funds, Money Market Funds are the cash part. They offer higher interest rates compared to regular savings accounts. They also allow you to have limited check-writing privileges.

2 Fixed income Fixed income is the second component. Fixed income investments are popular with moderate investors and with retired people. An investor can expect a 4 to 6 percent return. Various investments can help supplement additional income sources. The following is a description of each investment type. A corporate bond is a type of bond or debt instrument issued by a corporation for raising capital. Corporate bonds often pay higher rates than government or municipal bonds, because they tend to be riskier. The bondholder receives interest payments (yield) and the principal, usually $1000, is repaid on a fixed maturity date (bonds can mature anywhere between 1 to 30 years). Bonds are less risky than stocks, since the company has to pay off all its debts (including bonds) before it handles its obligations to stockholders. A Bond Mutual Funds are mutual funds, which invests in bonds. An investor typically purchases bond mutual funds with the objective of providing stable income with minimal capital risk. U.S. Government Treasury Bills/Notes is a negotiable debt obligation issued by the U.S. government and backed by its full faith and credit. They have a maturity of one year or less. They are the safest unsecured bonds available to the investor, since the possibility of the Treasury defaulting on payments is almost zero. The yield on these securities is the risk-free rate of return. U.S. Treasury Bills are exempt from state and local taxes. Municipal bonds (muni) issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, hospitals etc). Normally, to pay back the investors, the consumer pays the price of the project through some type of fee or tax. Yields on municipal bonds are often lower than corporate or Treasury bonds with comparable maturities, because of the important advantage of not taxed at the federal level. Utility Stock is

3 a stock in a basic service such as electricity, gas, or water, or the company that provides such a service. They offer a high rate of dividends or cash payments. Utility stocks are very popular with retired people. Overseas Bond Funds is an investment in overseas market. Mortgage securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower s purchase of a home or other real estate. As homeowners pay off the underlying mortgage loans, the investors receive payments of interest and principal. Ownership in real estate such as hay, crops, and apartments can provide income. Income comes from the sale of the product or rent from an apartment. Growth Assets Equity/Growth (Stocks) The third component is growth assets. An investor can expect a 10 percent return. With higher returns brings greater risk. This type of investment is for the aggressive investor. Investments in this component can follow the life cycle of a corporation. Starting from the beginning, which has the greatest risk, and ending with the blue chip investment, which has the least risk. It begins with the initial public offering (IPO), the first sale of stock by a company to the public. Companies classifications include large cap, medium cap, small cap, or micro cap, depending on their market capitalization. Market capitalization means how big the company is. This is based on total shares times the price. The micro-cap has less than $100 million. In addition, the company has no startup cash. The small-cap has a value of less than $750 million. The mid-cap value can range from $750 million to $3 billion. The large-cap has capitalization size of $3 to $4 billion. The Blue chip (also a large-cap) is stock of a large, national company with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products. They are an industry leader with high name recognition. Example

4 includes Wal Mart, GE, Microsoft, and IBM. These types of stocks are grouped into different sectors depending upon the company s business or whose components share similar characteristics. Some of these sectors are utilities, consumer staples, transportation, technology, and communications services. An investor can also purchase domestic or overseas, growth mutual funds. A growth mutual fund combines the assets mentioned above. This allows for greater diversification and less risk. Other miscellaneous items under growth assets include gold, silver, art, and antiques. Art and antiques are collectibles and are desirable because of its rarity, condition, utility, or other unique features. These items are often illiquid. These items are harder to sell; therefore, not easily converted into cash. Another growth category is real estate. An investor purchases vacant land and commercial property. These items appreciate and later sold for a profit. Growth and Income Assets The growth and income assets are the fourth component. This investment is for the moderate investor. Produced by combining cash, income, and growth categories, with this investment one can expect an 8 percent return. Blue Chip Stocks fall under this category. They produce dividends and appreciate. Balanced funds is a mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. Growth and income funds are a mutual fund whose aim is to provide both growth and income, often by investing in companies that have earnings growth as well as dividends. Equity income funds

5 typically invests in the shares of large, stable, "blue chip"-type companies whose stocks pay relatively high and consistent dividends. The main objectives are to provide capital appreciation and income. Lastly, real estate is a growth and income asset. This investment produces income (rent) and appreciates in value such as a duplex. Mutual Funds Mutual funds are an umbrella of funds. Basically, a pool of money that many investors put together. Each mutual fund invests in different things, and each fund has different goals. They invest in four departments, cash, income, growth, and growth and income. They provide the key to reinvest, spread your risk, and diversify your investments. Some various fund goals include aggressive growth, maximum income (high dividends) or equity preservation (low risk). When you invest in a mutual fund, you end up owning a tiny portion of each share of stock, (or whatever you have purchased). The managers of the funds take all the money and put it into different investments buying stocks and bonds. There are two types of investment managers, a passive manager, and an active manager. A passive manager buys from a pre mix ready-made index fund. Most of the time he comes to work to drink coffee. Use a passive manager when the market is flat. An active manager decides what they want to buy and sell based on their judgment and research. These funds are called managed funds. There is normally a fleet of people doing the research. When a market is moving fast, an active fund manager will be better to take advantage. Mutual fund companies have various fees and commissions that they charge in exchange for their services. The commissions they charge are called a "load". "No load" funds do not charge sales commissions but do not provide financial advice. All funds though charge management fees and some charge marketing fees as well. It is a good idea to compare these fees as they can

6 vary widely from company to company. A mutual fund should have less than 1 percent associated to fees. Index funds are great when you do not know which mutual fund to buy and do not want to learn about the funds or their managers. There are several indexes that track the values in the stock market and when the stocks go up in an index, so does the index's average. The Dow Jones average contains 30 stocks. The Standard & Poor's index(s&p 500) has 500 stocks. These are two most widely quoted indexes. Others include, Nasdaq, Russell 2000, and Wilshire Mutual funds constantly compare their performance to the various indexes. When you buy an index fund, it simply buys all the stock in the index you want. Armed with some information you can look up a fund in the investment section. It is important to learn how to pick a good one from a bad one. All major financial and personal finance magazines publish mutual fund performance ratings. The ranking compares performance among funds with the same investment objectives and then ranked for times listed. A is the top 20 percent and E is the bottom 20 percent. Next, look at funds that have done well over an extended period, at least five years. In addition, compare the 52-week high with the 52-week low. This will give you an idea where the stock or bond is and allow you to decide if it is a good buy.

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