Investment Portfolio 101

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. Its content is derived from sources believed to be accurate.

Neither the information presented herein nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. You are encouraged to seek tax or legal advice from an independent professional advisor.

When it comes to investing their money, many people are surprisingly content to proceed without a plan. Some enter the market on a hot tip, dumping a large amount of money without considering the balance of their portfolio overall.

Research has shown that people who prosper in the investment market select their assets carefully. On average, nearly 92% percent of the overall return on an investment portfolio is owed to choices made in which classes of assets to invest. Make smart decisions across your entire portfolio and you stand to do better than striking oil on any one magic investment.

When constructing your investment portfolio, these are the five broad classes of assets.

Cash is the most accessible asset you have. It includes the balance in your checking account, money market account, or certificate of deposit (CoD). Conventional wisdom holds that you should have three to six months’ salary in cash available to cover your bills in the event of an emergency.

Fixed-principal investments do not put your principal investment at risk from market forces; these include fixed annuities and trust deeds.

Debt makes up a third asset class. It includes municipal, corporate, government, and government agency bonds as well as other investments like collateralized mortgage obligations (CMOs).

Equity represents an ownership interest in a business entity, like stocks. It also covers any interest you may have in a closely held corporation or partnership.

Tangibles are assets backed by something material: real estate, art, gold, precious stones, stamps, baseball cards, or other collector's items.

How you choose to distribute your portfolio depends on your goals, your risk tolerance, and your expected rate of return. All investments are subject to changes in the market, loss of principal value, and other risks. When you sell an investment, its value could be higher or lower than what you paid for it.

Keep in mind that having a diverse portfolio of assets doesn’t mean you’ll be protected absolutely from loss. This just helps minimize risk to your finances by spreading it out.

Stan Molotsky is President and CEO of the Voorhees-based SHM Financial Group. He hosts The Molot$ky Money Hour live Monday at 10 am on WWDB-AM 860 in Camden, Burlington, and Gloucester Counties, and Saturday at 7 am on WWOB-AM 860 in Ocean and Monmouth Counties.