Bonds
A bond is simply a loan to an entity that borrows the funds for a fixed amount of time and at a fixed interest rate. The borrower can be a company (corporate) or a government (federal, provincial or municipal).
Bonds can be good when you require a portion of your portfolio to be stable. As a result, a general rule (which I don’t follow) is that the percentage of your portfolio that is invested in bonds should be equivalent to your age. So, for example, if you are 40 then 40% of your portfolio should be bonds and the remaining 60% should be equities. The basic theory here being that as you grow older and nearer to retirement, the value of your portfolio should become more and more stable.
I’m in my 30’s and have 0% bonds and the reason is because the stocks I do invest in are pretty much all blue-chip boring stocks. Now if I was investing in highly speculative stocks I would be more inclined to balance that with the relative safety and security of bonds, but I’m just not into that.
Cash
Cash is cash. It is wise to keep some cash on hand at all times. How much depends on a number of factors. You really don’t want to be forced to sell your investments in the case that you suddenly need cash (the stock market may have just crashed!) so be responsible. At the same time, don't sit around with a tonne of cash waiting for a buying opportunity. That's called 'timing the market' and it has been proven not to work.
Real Estate
Note that if you own a home, then you already have some real estate in your portfolio. You can also have rental properties. It is debatable as to how to include the value of your own home in your overall portfolio/asset mix. For myself I choose NOT to include it in my overall portfolio mix at all (as I never want to be without a home!). If you do own a rental property then you need to consider this in your overall asset mix.
Alternative Investments
Alternative investments includes options, futures, FOREX and gold (and silver, etc). There are lots of others as well. Bottom line – I’m not that interested. There’s plenty to keep me occupied with the other investment types listed. I do own a little gold (via an Income Trust) based on the fact that so many people think it is important that they may drive the price up.
Gold baffles me in reality. This quote from Warren Buffet sums up my feelings as well:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
