In order to invest properly and to increase your assets to ensure your financial security, you need to develop a long- term investment plan. In order to do this, factors like your age, stage of life, personal priorities and risk tolerance have to be considered in order to design an investment strategy that meets your needs.
It is a well-known fact that every investment can be risky, but some investments have a greater risk than others. Risk tolerance is the amount of money you feel comfortable investing with the risk factor in mind. If you are basically a conservation person, then you will probably be most comfortable taking limited risks by investing in cash, secure stock and fixed income investments. If you consider taking moderate risks, than you could consider putting your assets into growth stocks, and if you are willing to take significant risks, then high-risk investments are for you.
There are different types of investments to choose from. Stocks are equity investments that give you a share in a corporation. Bonds or fixed income securities pay interest over a fixed period of time. To understand mutual funds you need to know that they are diverse equity funds that pool money together from many different investors for greater purchasing power. Futures are obligations to buy or sell a specific commodity at a preset price on a specific day. Options give you rights to buy or sell a specific stock, bond, etc at a preset price during a specified time period.
The term asset allocation simply means how you divide your investments between stocks, bonds, mutual funds and cash equivalents. This depends on your financial goals, when you want to achieve them, and your willingness to risk. Next in line comes diversification that allows for further spreading your investments between the major asset categories of stocks, bonds and cash equivalents. Diversification helps you decrease your investment risk. As you know, no investment is risk free. Without risk, there would be no reward.