Stocks, bonds, and cash are the substance of a diversified portfolio.
Most female investors — from the newest to the most experienced — focus on three investment categories: stocks and stock funds, bonds and bond funds, and cash or cash equivalents. Each type of investment puts your money to work in a different way, but they have similarities that help make them attractive. They’re easy to buy and sell. They’re available at a wide range of prices. And they have the potential to provide the primary benefit of investing — the possibility for growth.
Building a portfolio
Your goal as an investor is to build a diversified portfolio, or collection of varied investments. Diversification means that rather than buying just one stock, you buy a number of stocks in different types of companies. At the same time, you put some of your principal, or investment capital, into a number of bonds or bond funds, and some in cash or cash equivalents.
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The reason you diversify is that investment categories, also called asset classes, have their ups and downs. When stocks are strong, bonds may not be. The reverse is true as well. When bonds are strong, stocks are often weak. Sometimes, though not all the time, cash equivalents, such as certificates of deposit or US Treasury bills, do better than stocks or bonds.
Since there is no way to predict which category will be performing best at any given time, you can be ahead of the game by having some money in all three categories, either directly or through mutual funds or exchange traded funds (ETFs).
Stocks
Stocks are equity investments, or ownership shares in a business. When you and other investors buy shares, you actually buy part of the business. If it prospers, you may make money because you’re paid a portion of the profits, because the value of the stock increases, or both. While you can’t predict the future, stocks have historically been stronger long-term performers, but have also been more volatile than the other types of investments described here.
Bonds
Bonds are loans that investors make to corporations or governments. When they borrow, these bond issuers promise to pay back the full amount of the loan at a specific time, plus interest, or a percentage of the loan amount, for the use of your money. Investors buy bonds, also known as fixed-income investments, because they expect to receive their investment amount back, and because they like the idea of regular interest income.
Funds
Funds are pooled investments that hold many individual investments, primarily either stocks or bonds but sometimes a combination of stocks and bonds. One advantage of investing in funds, such as mutual funds and exchange traded funds (ETFs), is that with a single purchase you gain access to a diversified portfolio — though some funds are more diversified than others. A fund’s return is linked to the performance of the investments it holds.
Other investment opportunities
| CDs | Real estate | Annuties | Art and collectibles |
Gold | Futures and options |
|---|---|---|---|---|---|
| CDs are income investments that pay interest on a specific amount of money for a specific period of time. | Real estate includes land and buildings. These properties may increase in value and can provide tax advantages. |
Annuities are tax-deferred savings plans designed to provide future income, at either a fixed or variable rate. |
Art and collectibles are investments whose value varies based on quality, availability, and fashion. |
Gold and other precious metals are investments of enduring worth, though their market prices vary as supply and demand changes. |
Futures and options are derivative investments, which change in value as the investments they’re linked to change in price. |
Investment vocabulary
Stocks and bonds are securities, a term that once referred to the documents companies and governments issued to represent ownership or obligation. Today most investment information, including records of ownership, is stored electronically. You don’t get stock or bond certificates — but the name securities has stuck.
It’s also helpful to know that investments are sometimes referred to as products or vehicles, since you’re apt to hear those terms. A product or vehicle is usually an investment that gives you access to a number of securities in a single package. Often that package includes something of additional value, such as professional investment expertise in the case of mutual funds or the guarantee of lifetime income in the case of annuities.
Risk and reward
With all investments, there’s an expectation of reward — known as return — and an element of risk. And in general, the greater the chance for a substantial reward, the greater the risk of a loss. Though it’s almost impossible to predict any investment’s behavior accurately, a time-honored approach to achieving a better balance between risk and return is to own a number of investments in several asset classes. In fact, the ideal investment portfolio for a typical investor is often described as a pyramid, with low-risk/low-reward investments providing the base and high-risk/ high-reward opportunities at the apex.
Building Diversified Portfolio For Female Investors by Inna Rosputnia
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