Investment Diversification cont'd - Cash

In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:

- safety - the value stays reasonably consistent,

- liquidity - it's available with no hassle when you need it,

- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,

- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.

Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:

- plain old-fashioned bank savings account (FDIC insured),

- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,

- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,

- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.

Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.

For Better or For Worse, For Richer or For Poorer...

With all the fuss of Valentine's Day behind us, I thought I'd take a look at love from a financial perspective.

What do you look for in a mate, financially, that is?
There are things you want to find out sooner rather than later. How do you determine your "financial compatibility" early in the relationship.?

Honesty - disclosing all debt: student loans, car loans, credit cards, bankruptcy, etc. Mortgages and student loans are okay; they have positive potential. But credit card debt can be damaging and linger for years.

Attitude - spender vs saver? Live for today or save for tomorrow?
Does he spend everything he earns? Does she borrow from her parents? Is shopping her favorite pass time? Must he have a new car every year? Is the latest iPhone a necessity?

Generosity - sharing both the good and the not so good.
Does she expect you to pay for all dates? Does he ask you for gas money when his car is used for trips? Is he/she a big tipper, skimpy tipper or fair tipper? Does he insist on using your car all the time? Does she offer to pay for half or her share?

$ Savvy - shows responsibility about money. Are his bills paid on time or overdue? Does she always request an extension for paying income taxes? Does he have an investment account? Does she know a CD is not just a compact disc? Has she contributed to an IRA or 401K?

Co-mingling assets could prove problematic if you are not willing to learn the financial side of your prospective mate.

Be $ Smart - Protect your heart and your wallet by watching for telltale traits.

And for the ladies, please remember: "A man is not a financial plan!"

Risk Tolerance

Risk - the permanent loss of capital (money).

Over the past few weeks we have experienced much volatility in U.S. stock markets.
Volatility is the gyrations of stock prices in reaction to social and economic conditions. With the market moving up and down - making money and losing money - how do you protect your money and your future?

How much money can you bear to lose? NONE - most would say.
If we ask the question slightly differently - how much money must you keep absolutely safe to allow you to sleep at night? Your answer may show how much risk you are willing to take. Some may say 100% - then you would be considered risk adverse.

Others may say 20%; they would be considered to have a low risk tolerance.
But none of us likes to lose money. So how do I know where to put my money?

Money needed soon (1-2 yrs.) for a definite goal - a house down payment, a new car, an upcoming vacation - all must remain safe with little or no risk. The safe places to keep this money are:
savings accounts,
CD's (certificates of deposit at a bank)
most money markets.
You have NO risk tolerance for this money.

Money slated for mid-term goals (3-8 yrs.) - an Alaskan cruise in 5 years, college tuition for your ten-year old, a vacation house in 4 years - may earn slightly more interest if invested in short-term bond funds or certain high quality (blue chip) stocks.
You have small risk tolerance for these goals.

Money designated for retirement - 15, 20, 30 years away need greater exposure to risk to provide the growth necessary to build a sufficient nest egg. Here is where investing in stocks and bonds gives you growth opportunity but also increases loss possibility.
You have moderate risk tolerance for long term goals.

Extra money, over and above all your savings, may be allocated to higher risk.
This is not the rent or mortgage money. This is money you can afford to lose.
Real estate, commodities (e.g.metals, oil, coffee, grains) fluctuate wildly(high volatility)
You have high risk for these investments.

Be $ Smart - know your risk tolerance. Invest wisely so you may sleep well.