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Investment Vehicles

CASH vs FIXED INCOME vs EQUITY

When allocating your portfolio there are three main asset classes used to develop a suitable allocation for your portfolio.  They are cash, fixed income, and equity.  Each plays an important role and carries a different level of risk and exposure.

There are several investment vehicles to choose from for each asset category.  Not every investment vehicle listed below may be suitable for every investor and should be carefully considered before investing.

CASH ALLOCATIONS - This asset category attempts to focus on capital preservation.  It carries the lowest level of risk and often has short term obligations.

  • Money Market– These vehicles carry lower risk, but funds are still not guaranteed as we experienced with the September 2008 collapse of the banking system.  Most money market instruments are covered up to certain amounts, by SIPC and not FDIC insured.

  • CD’s- CD's or Certificates of Deposit.  They can be both short term & long term; you may earn a moderate rate of return.  Most but not all are FDIC Insured.
  • Interest Bearing savings and checking accounts - usually held at a bank, savings and loan, or credit union.  They earn an interest rate which varies slightly from institution to institution.  Most of these are FDIC Insured.

  • Asset Management Accounts - Like a checking account but they are often held by a brokerage institution and the funds can be used to trade securities.  Many times earnings from securities are swept into these money market accounts and are often times covered by SIPC and not FDIC insured.  

Treasuries and Savings Bonds

Treasuries and Savings Bonds have characteristics of fixed income features as well as cash features.

  • Treasury Bills - short term loans to the federal government with maturity dates of 3 months, 6 months, or one year.  If not held until they mature they may be worth less than their original cost.  They are backed by the full faith and credit of the United States. The interest paid is exempt from state and local taxation.  However, these securities do not protect against risk caused by the market or new legislation.
  • Series EE US Savings Bonds - are an accrual-type savings security.  They are sold at face value. They are worth their full value upon redemption.  You will receive semi-annual interest payments.  The annual limit for purchasing EE Savings Bonds is $10,000.  Redeeming these bonds early, in the first five years, you will forfeit 3 months of interest payments.  There is no penalty for redemptions after five years.
  • Series I US Savings Bonds - are inflation-indexed. Series I Bonds offer a fixed rate of interest, adjusted for inflation.  They are sold at face value.  The annual limit for purchasing I savings bonds is $10,000.  Redeeming these bonds early, in the first five years, you will forfeit 3 months of interest payments.  There is no penalty for redemptions after five years.

    You will not pay state or local taxes on the interest earned on US Savings Bonds and federal taxes are deferred until you cash them in, or the bond matures.  Also additional tax benefits may be available if used for qualified education expenses.

FIXED INCOME ALLOCATIONS - This asset category attempts to focus on income via interest and dividend payments.  This category carries a middle of the road level of risk.

Bonds - Corporations, local municipalities, or the US Government issues bonds to raise capital. Interest is usually paid two times a year and is considered income.  Each bond type is governed by a different entity and each carries its own level of risk.  There are several factors to consider when purchasing bonds.  The following are just a few: credit rating of the issuer, the maturity of the bond, inflation, interest rates, taxation, liquidity, and suitability. 

Types of Bonds

US Government Bonds and Notes - These are debt obligations that are issued by the US Government to fund its operations and finance the federal deficit.  Notes have a maturity of between 1 - 10 years, while bonds mature after 10 years.  They are backed by the full faith and credit of the United States.  They are exempt from state and local taxation.  However, these securities do not protect against risk caused by the market or new legislation.

Municipal Bonds - Debt obligations of state and local governments and their agencies.  Those who buy muni bonds are investing in public works and construction projects for the designated municipality.  The interest payments received are tax favored, as the Federal Government does not generally charge taxes on these interest payments. Capital gains are still taxed at all levels.  There are two types of muni bonds, General obligation muni bonds and Revenue muni bonds.
Municipal Bond governing Authority - Please refer to the MSRB (Municipal Securities Rule Making Board) website and important brochure.pdf. before considering any investment into municipal bonds.

Corporate Bonds - There are two main types of Corporate Bonds, secured and unsecured.

Note: Bond duration correlates closely with the interest rate environment and should be considered carefully.

EQUITY INVESTMENT ALLOCATION - This asset category attempts to focus on growth.  This category carries the highest level of risk.

  • Common Stock - A company issues stock as a means of raising business capital.  You purchase a share of ownership in the company's net-worth.  The main goal of stock ownership is growth.  With this ownership comes rights as a shareholder.  For each share held, you have a proportionate right to profits (or losses), dividends paid out, and voting rights. If the company does well, you do well, if not you lose.  There are many risks involved with purchasing common stock and each should be considered carefully.
  • Preferred Stock – This is a second type of stock that a company may issue.  This type of stock often provides a fixed dividend which is paid semiannually.  There are three major features in which preferred stock differs from common stock:
    • Preferred Stockholders usually do not have voting rights.
    • Preferred Stockholders must receive dividends before Common stockholders.
    • Preferred Stockholders have a higher claim priority on assets than Common Stockholders (in case of a company liquidation).

While the income generated from Preferred Stock may be attractive, these shares carry less growth potential than Common Stock.  All of these characteristics should be considered carefully before investing in these shares.

Dividends - A company that has extra capital may pay its investors a dividend.  Paying a portion of their profit to shareholders is often done on a fixed schedule but can be done at any time.

One investment strategy is to re-invest these dividends.

OTHER INVESTMENT VEHICLES THAT MAY FALL INTO ONE OR ALL THREE OF THE ASSET CATEGORIES OF CASH, FIXED INCOME, OR EQUITY ALLOCATION

Mutual Funds
Professionally managed investment vehicle that buys a diverse group of stocks.

There are several important factors to consider when investing in mutual funds. Some of them are as follows:

- Expense Ratios
- Sales Charges
- Turnover Ratios
- Loads
- Transaction fees
- Breakpoints for possible savings

Mutual fund types often play a role in the overall costs involved in buying and selling mutual funds.  There are several different types.  Listed below are just a few of the most common:

A Fund - You pay a commission up front (a front-end load).
B Fund - Back end commissions are paid. They have a Contingent Deferred Sales Charge (CDSC).
C Fund - or level load shares, you pay a commission each year. This commission never goes away.

Mutual Fund Categories
All Mutual Funds are classified into different categories.  The following is not limited to but includes these broad categories:

Large Cap Equity - A fund that holds stocks in the top 70% of the capitalization of the U.S. equity market.

Mid Cap Equity - A fund that holds stocks in the mid-cap range, approximately 20% of the total capitalization of the U.S. equity market.

Small Cap Equity - A fund that holds stocks in the bottom 10% of the capitalization of the U.S. equity market.

Sector Equity - A fund that holds stocks focused on any one industry or sector group.

Allocation - Allocation funds hold stocks which attempt to provide income and capital appreciation.  These funds invest in a predetermined allocation of stocks, bonds, and cash.  Lifecycle funds are a common fund type that fall into this category.

International Equity - A fund that holds approximately 40% or more of their equity holdings in international stocks.

Taxable Bond - A fund that holds approximately 70% or more of their assets in taxable bonds.

Municipal Bond - A fund that holds approximately 70% or more of their assets in municipal bonds.

Money Market - Funds that invest most of their holdings in short-term money market securities.

Insurance Investment Vehicles
Although there are many insurance investment options available, only Variable Annuities are considered an investment vehicle.  Please see Capital Needs Analysis page for further information regarding insurance investments and Variable Annuities.

Risk for each category varies.

Please contact Kim Doleman, Investment Advisor Representative, for more details.

*please see below for important disclosure