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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Saturday, September 16, 2006

Long-Term Investment Strategy

When developing an asset allocation program you need to understand what your options are and what defines them.

Stocks
You can divide stocks into large, mid, and small cap stocks--strictly based on their market capitalization. Foreign companies are represented in international stocks. Owning some of each asset class you will lower your risk and help your portfolio's performance in the long run.

Bonds
The U.S. government is the largest bond issuer in the world. The payment of interest and pricipal is backed by the U.S. Treasury. This being said, U.S. bonds are considered one of the safest investments in the world. Corporate bonds will typically offer a higher interest rate of return because their is a risk that the company could default. Municipal bonds are issued by state and local governments and any income made from this is exempt from federal taxes. International bonds are issued by foreign governements.

Cash Equivalent
Cash equivalents represent investments in short-term, high-quality securities like money market funds, Treasury bills, and certificates of deposit. These investments are much less risky and more liquid.

Real Assets
Real assets are those assets falling outside of traditional classifications of stocks, bonds, and cash equivalents. They have a value outside of the monetary units in which they are dominated and can help hedge against inflation.

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