Defining the type of securities to invest in

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Defining your basic investing objectives and strategy is the first step in developing a portfolio. After that, you need to define what types of securities to invest in. These are called asset classes. They include stocks (equities), bonds (fixed income), and cash equivalents like money market funds or bank accounts.
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Asset classes have different risk profiles. Stocks, for example, tend to be more volatile but also offer higher returns over time than bonds. Over the long term, however, bonds are less risky and produce lower returns. This means they don't make sense as core holdings unless you're willing to wait a very long time for your money to grow.

The best way to balance these two risks and return profiles is with asset allocation; the process of spreading your investments across different asset classes.

The right mix of assets depends on your goals, investment horizon, risk tolerance, and other factors. But most investors would benefit from including at least some stocks in their portfolios. For one thing, stock ownership is required if you want to build wealth by owning the businesses that provide goods and services we all use every day: food companies, automakers, airlines, hotels, department stores, media outlets, and so forth.

Stocks are also the only way to share in the growth of companies whose products you enjoy and may even love but can't afford to buy without help. In addition, stocks generally deliver the highest returns over the long run when compared with other asset classes. And by owning a diversified portfolio of stocks, you'll reduce the impact of wild price swings and volatility that are common among individual securities.

If there's anything worse than watching your retirement account fall apart because of an unforeseeable disaster such as a corporate bankruptcy or recession, it's having your portfolio go into freefall because of a single bad decision based on poor timing. That's why the vast majority of investors should consider adding some equities to their portfolios. Of course, not everyone needs or wants exposure to equities.

Some people are better off investing exclusively in bonds. Others may want to focus entirely on gold and precious metals. It's important to remember, though, that the purpose of any given asset class is to serve its particular function.

For instance, if you want to achieve the maximum possible rate of return while reducing the overall risk of loss, then you'd be wise to avoid buying risky assets such as commodities and foreign currencies. Instead, you'd choose safer fixed-income instruments like Treasury bills and notes.

However, you might also decide to take a bit more risk by using commodity futures contracts instead of physical commodities to reduce the impact of currency fluctuations. You could also add options strategies or exchange-traded funds (ETFs) that allow you to participate in movements within various markets. All these choices will require additional analysis and research.

Your goal is to get your financial affairs in order, create and stick to a solid investment plan and put your hard-earned dollars to work where they will do the best for you. When you've done this, it becomes easy to relax and watch the fruits of your labor unfold.

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