Debt Views

A vehicle is a device that takes you from one place to another. Just like a car will get you to where you’re going an investment can do the same as long as you know where you’re going. A financial plan is like a map with a starting point and an ending point. The vehicles are the investments you make to get you there.

Cash

It’s not really an investment but it’s the most liquid of all assets. Liquidity is measured by how quickly something can be converted into cash. All investments start with cash. You have to have money to invest.

Savings Accounts

Very safe. Very secure. Very boring. Should be used to save for a short term (less than one year) investment. Ie savings for the down payment of a house. There is risk in that the interest you’ll earn will barely keep ahead of inflation and is fully taxed. Combine the two and your money in real dollars may actually be worth less in the long run.

GICs

Not much better than savings accounts but slightly higher rates. Same purpose – for short term investing. Can also be used as a hedge if you are investing large sums of money in risky ventures.

Money Markets

Similar to GICs in their rate of return. Mostly made up of government TBills and asset backed commercial paper. Recently ran into some short term instability but only affected a small portion of the market.

Bonds

Basically an IOU. A little more risky in that the prevailing interest rate affects it’s worth. Most provide steady reliable income, which offsets the interest rate risk. Good investment when rates are falling, not as good when rates are rising. Can be government or corporate issued. The largest of all markets is the bond market. Most of the money in the world is tied up in bonds.

Stocks

A stock is technically a share of ownership of a company. More risky than a bond, however that risk varies greatly depending upon the industry, age and size of the company. Some stocks have voting rights, some don’t. Some pay guaranteed dividends (like an allowance for ownership of the stock, it’s dependent upon the performance of the company) some don’t – usually smaller companies in the growth phase who need as much money as possible to stay in business and expand.

Derivatives

Called as such as they derive their value from the value of the underlying investment. These include warrants and options. Can be extremely risky and require advanced knowledge to become adept at trading them.

Mutual Funds

They are a pool of funds that usually includes either stock, bonds, cash or a combination of the three. They are all professionally managed and have a hidden fee as a result. For the average investor these can be a good choice as they don’t require a lot of “hands on” investing.

It’s important to keep in mind the risk/reward ratio. The greater the risk the greater the reward. If you’re looking for guarantees you’ll have to sacrifice investment returns. As with all things if it sounds too good to be true it probably is.

No matter what vehicle you choose you need to have an idea of where you want to go and the kind of investor you are. There is no “perfect” investment; they all have their good and bad points.