Investors assume risks in an attempt to have a higher return on their investment. Bank certificates of deposits or CD and Treasury bills are as close to a risk free environment as possible. The problem with these investments is that they do not keep up with inflation.
Market risk is based on changes in the equity or debt markets to affect the investment. This fluctuation can change the price of equity and debt investments, Credit risk is usually associated with income producing securities like bonds. Credit risk also involves the ability of governments, corporations and individuals to repay the money loaned to the obligation.
To reduce these risks; an investor can choose high quality securities to deal with credit risk. For example, a financial analyst can analyze a company to see if they have the cash flow and profits to repay the debt on a bond.
These risks can be reduced by investing in only high grade bonds or blue chip companies or stocks. The idea is to invest only in the best quality bond or stocks based on an analysis of the financial statements. this is another way the investor can reduce their risk.
Planning for Retirement should focus on the additional income needed from the investment portfolio, and the Asset Allocation formula [relax, 8th grade math is plenty] needed for goal achievement will depend on just three variables: (1) the amount of liquid investment assets you are starting with, (2) the amount of time until retirement, and (3) the range of interest rates currently available from Investment Grade Securities.
If you don't allow the "engineer" gene to take control, this can be a fairly simple process. Even if you are young, you need to stop smoking heavily and to develop a growing stream of income... if you keep the income growing, the Market Value growth (that you are expected to worship) will take care of itself. Remember, higher Market Value may increase hat size, but it doesn't pay the bills.
There are usually three main asset classes that can be broken up into sub classes. The three main classes are bond which are income producing securities. Stocks also know as equities. And finally, gold which could also be other precious metals.
The sub classes can include short-term or long-term bonds. Each asset class reacts differently based upon where the economy is during the economic cycle. For example, stock or equities do well during periods of economic expansion. Bonds do better during periods of economic contraction. Gold and precious metals do well during periods of inflation or when the national currency is being devalued.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation... and that requires some discussion. Asset Allocation is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that diversification and Asset Allocation are one and the same. Asset Allocation divides the investment portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income Securities. Most Investment Grade securities fit comfortably into one of these two classes.
Diversification is a risk reduction technique that strictly controls the size of individual holdings as a percent of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in stock and bond prices, and/or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to a stronger one... a subtle "market timing" device.
Finally, the Asset Allocation Formula is often misused in an effort to superimpose a valid investment planning tool on speculative strategies that have no real merits of their own, for example: annual portfolio repositioning, market timing adjustments, and Mutual Fund shifting.
The Asset Allocation formula itself is sacred, and if constructed properly, should never be altered due to conditions in either Equity or Fixed Income markets. Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision-making process.
Market risk is based on changes in the equity or debt markets to affect the investment. This fluctuation can change the price of equity and debt investments, Credit risk is usually associated with income producing securities like bonds. Credit risk also involves the ability of governments, corporations and individuals to repay the money loaned to the obligation.
To reduce these risks; an investor can choose high quality securities to deal with credit risk. For example, a financial analyst can analyze a company to see if they have the cash flow and profits to repay the debt on a bond.
These risks can be reduced by investing in only high grade bonds or blue chip companies or stocks. The idea is to invest only in the best quality bond or stocks based on an analysis of the financial statements. this is another way the investor can reduce their risk.
Planning for Retirement should focus on the additional income needed from the investment portfolio, and the Asset Allocation formula [relax, 8th grade math is plenty] needed for goal achievement will depend on just three variables: (1) the amount of liquid investment assets you are starting with, (2) the amount of time until retirement, and (3) the range of interest rates currently available from Investment Grade Securities.
If you don't allow the "engineer" gene to take control, this can be a fairly simple process. Even if you are young, you need to stop smoking heavily and to develop a growing stream of income... if you keep the income growing, the Market Value growth (that you are expected to worship) will take care of itself. Remember, higher Market Value may increase hat size, but it doesn't pay the bills.
There are usually three main asset classes that can be broken up into sub classes. The three main classes are bond which are income producing securities. Stocks also know as equities. And finally, gold which could also be other precious metals.
The sub classes can include short-term or long-term bonds. Each asset class reacts differently based upon where the economy is during the economic cycle. For example, stock or equities do well during periods of economic expansion. Bonds do better during periods of economic contraction. Gold and precious metals do well during periods of inflation or when the national currency is being devalued.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation... and that requires some discussion. Asset Allocation is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that diversification and Asset Allocation are one and the same. Asset Allocation divides the investment portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income Securities. Most Investment Grade securities fit comfortably into one of these two classes.
Diversification is a risk reduction technique that strictly controls the size of individual holdings as a percent of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in stock and bond prices, and/or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to a stronger one... a subtle "market timing" device.
Finally, the Asset Allocation Formula is often misused in an effort to superimpose a valid investment planning tool on speculative strategies that have no real merits of their own, for example: annual portfolio repositioning, market timing adjustments, and Mutual Fund shifting.
The Asset Allocation formula itself is sacred, and if constructed properly, should never be altered due to conditions in either Equity or Fixed Income markets. Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision-making process.
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