How to Choose an Investment; Pyramid of Investment Risk

When you choose to invest your money, the final decision is yours alone. The risk of the investment is also yours.

Points to Consider Before You Invest

  • What is the prospective yield?
  • What is the return you hope to achieve?
  • What is the risk?
  • Can the investment easily be sold or converted to cash? Is there a charge to do so?

Let's Look at Some Common Types of Investment Alternatives

Insured savings account

Available through banks, savings and loan associations, and other financial institution; insured by a government agency; considered safe and convenient; associated with checking alternatives such as NOW accounts.

U.S. savings bonds (EE or HH)

Available through many financial institutions and payroll deduction plans; provide an opportunity for you to invest in the U.S. government by buying a bond with a set maturity date at a price below face value.

Certificate of deposit
Savings certificates in a specific amount of money for a specific amount of time with a specific rate of interest; one main feature is convenience.

Treasury issues
Bills, notes, or bonds, in denominations of $1,000 to $1 million; mature from 30 days to more than five years after issue by the Treasury Department.

Bonds
Certificates of debt; issued by corporations or government agencies that promise payment of interest on specific dates, with payment of the original investment amount at maturity.

Mutual Funds
Diversified investment alternative; for individual investors to pool dollars that are professionally managed, to meet various investment objectives.

Stock
Investment that represents a share of ownership in a company; value of the stock may increase or decrease, based on the success, or perceived success, of the corporation.

Collectibles
May be coins, stamps, artwork, baseball cards, or any of a number of other items that can be bought, held, and sold, depending on supply and demand.

Commodities

Life's basics, such as food, wood, and metals, that can be purchased in contract form to speculate on future world demands, or to "hedge against present investments.

While, the most common types of investments or "securities" are stocks, bonds and mutual funds, securities can also include: futures and options, real estate, promissory notes, limited partnerships, oil and gas leases and investment contracts.

The investment alternatives I have discussed are ranked in order of the relative safety of these investments -- from low-risk at the top to higher risk at the bottom. Another way of looking at this is to turn the list upside down and imagine it as a pyramid.