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Investment, Speculation, and Gambling are terms often misused; select the word(s) for a definition.

1. Bank Account: CD's, checking, etc. (no more than $100,000 in any one bank)
   
2. Cash or Money Market Funds
   
3. Debt Investments: Bonds and Bond Mutual Funds
   
4. Common Stocks and Stock Mutual Funds
   
5. Real Estate
   
6. Collectibles
   
7. Options
   
8. Futures
   

• Unless you're a near expert in the respective field, don't consider categories 6, 7 or 8 for investments.  In other words, the risk is too high (speculative) for investors without commanding knowledge of these fields.

• Category 5, Real Estate, is a very localized investment fraught with more "negatives" than many realize and often not easy to sell on short notice (illiquid).  However, it is - if bought, managed, and sold correctly - a great source of wealth.  Because Real Estate is often purchased for other reasons besides investment (personal choice, financial control) these need to be weighed in the consideration.

• Category 4, Stocks, is probably the best general category to invest in for long term capital appreciation.  Along with the increased reward potential comes increased downside risk on a short term basis.  It's a fact, though, that the risk of negative returns in Stocks or Stock Mutual Funds has decreased the longer one has held them.

• Category 3, Bonds, usually has better returns than categories 1 and 2; plus in most cases Bonds provide a good degree of safety.  Within this one category, however, there's a wide range of risk; from Junk Bonds with the highest risk, to US Treasury Bonds with the lowest.

• Categories 1 and 2 usually have returns that are near the rate of inflation.  In other words, not a good return on your investment for the long term; though they are very low in risk.

In general, Stock Mutual Funds are more safe than individual Stocks; because of, primarily, diversification and professional management.  A well diversified Stock Mutual Fund will have 16 or more stocks from varying industry groups.  The professional management allows you to concentrate more on your job, family, and friends; instead of spending the large amount of time needed to manage a portfolio of individual stocks successfully.  Having said that, some investors do well owning individual stocks.  Currently, this Web site does not offer suggestions concerning individual stocks; but, some of the resources and definitions available here will help those so inclined.

Once committed to investing, you should give top priority to setting your overall asset allocation.  Basically, determine what portion of your investment capital should be used in each of three general investment categories: cash, bonds (debt), or stocks (equity).  As in the other portions of my Web site, when referring to stocks or bonds, mutual funds that invest in these securities are included.  A traditional rule for calculating asset allocation is to subtract your age from the number 110, the result is the percentage of your total investment capital that should be in stocks; the remainder of your portfolio would be divided among the other two categories in proportions dependent on your need for income (bonds) and liquidity (cash).  As an example, say you're 50 years old: 110 - 50 = 60% of overall investment capital in stocks; therefore, 40% would be left to divide between cash and bonds.

The above rule for determining asset allocation is by no means the only method currently used.  I prefer to use a less rigid rule: up till age 40, 100% in stocks; at age 60 and beyond, 50% or less in stocks; between ages 40 and 60, percent in stocks is 50% to 100% determined by personal choice and situation with the caveat to begin reducing overall stock percentage below 100% by age 50.  Again, as above, the remainder would be divided between cash and bonds in a manner suited to your personal needs.

Some of you may question having 50% in stocks at age 60.  The reason for this, in a word, is inflation.  At age 60 one may live for another 30 or more years, therefore, your nest egg's real value (if in bonds or cash alone) would likely erode over 50% by the end of that time; having a portion in stocks is a hedge against inflation.