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Saturday, August 21, 2010

Investing - Understand Your Assets

Whatever its complexity, an economy stands or falls upon very basic foundation stones. Individuals must be free to think and act on their decisions.

They must be able to gain the rewards of being right and must bear the cost of being wrong.

They must be able to concentrate on what they do best, and what they most enjoy doing, instead of spending their time providing for their immediate wants.

They must be able to make provision for the future by preserving a portion of what they have produced.

In short, they must think, they must produce and they must save. And to do that to the greatest and most efficient extent possible, they must trade with each other.

A person alone in nature can certainly think, act, and gain the rewards of being right or bear the cost of being wrong. He can also, by means of great effort, put aside savings, but only for a limited period of time. Indeed, anyone alone in nature has no choice but to do these things, if he is to survive at all!

In our advanced economy, physical survival is not often an issue. The extent to which individuals can think, work, produce and trade freely determines the potential of the economy. The confidence with which individuals can save and invest long term determines the prosperity of the economy.

To save, invest, and plan for the long term is a luxury not granted to anyone alone in nature. It is the exclusive preserve of those living in an advanced economy.

The evolution of any civilized society is dependent on the discovery of the idea of money, and on the discovery of something that can be used as money. The future of any civilized society is dependent on the quality of what can or is used as money.

Money can also be described as an asset. Assets not immediately consumed can be turned into investments.

Investments are falling into one of two following main categories:

1. Real &

2. Financial

The distinction between the two rests with whether or not the asset in question can be physically touched.

Real assets, also known as tangible assets, may be broken down into three groups:

1. Real Estate

2. Commodities, such as gold and silver &

3. Collectibles, like art, stamps, coins etc.

In part due to their finite supply or unique characteristics, real assets normally show the best appreciation when inflation is high.

Financial assets, sometimes referred to as intangibles, are separated into three areas:

1. Stocks

2. Bonds &

3. Cash

Each category has its own risk and reward characteristics.

A stock represents an ownership stake in a company and provides the stockholder with a slice of the company's profits.

A bond reflects a loan made by an investor to either a government or a corporation. To compensate the investor for making a loan, the borrower agrees to pay back the principal sum of the loan plus interest payments on the principal.

The third component of the financial asset menu is cash, though this does not equate with the paper stuff in your pocket. In the investment world, cash is lingo for an asset that is virtually riskfree, such as a bank certificate of deposit.

Over the course of a lifetime of investments, each type of financial asset will have its place in your portfolio.

Stocks are used to build wealth due to their capital appreciation potential, while bonds offer income, and cash is valued for its safe-haven characteristics.