Every portfolio must include a range of nonstock investments. Given the inverse relationship between risk and reward, most investments in this category --- from government bonds to annuities --- yield returns that are far below stock market gains. However, debt instruments provide sustained income at pre-determined rates of interest. Investors with a small capital and low risk tolerance should avoid derivatives such as commodities futures. Nonstock investments are available at all financial services institutions.
Investors with a high level of tolerance for risk could trade in commodity derivatives such as livestock, meat, metals, energy, coffee, soybeans and sugar on commodity exchanges. A slightly less risky option is to invest in mutual funds that invest in commodity futures, or exchange traded funds that focus on commodities.
Some well-known funds include the Oppenheimer Real Asset Fund, PIMCO Commodity Real Return Strategy and the Dow Jones AIG Commodities Index. S&P GSCI, which consists of an index of 24 commodities, benchmarks investments in global commodity markets.
A list of more than 700 commodity brokers is available at Commodity Brokers Online (http://www.commoditybrokersonline.com).
Bonds (Debt Instruments)
Investors approaching retirement age can significantly reduce their risk by investing in U.S. Treasury bonds, municipal bonds and corporate bonds. You can enter the bond market by investing in bond mutual funds, purchase U.S. treasuries through your broker or financial planner, or buy bonds directly from your state government. Choose bond mutual funds according to your preferred weight -- government securities, mortgage-backed securities or asset-backed securities. Investment windows range from short to to long-term.
Fixed income investing is an integral component in retirement planning. Fixed or variable annuities--which can be purchased from your financial planner or insurance agent--provide consistent, lifetime income at periodic intervals. When you buy fixed annuities, you make a sizable payment in exchange for monthly income throughout your lifetime. The capital is taxable, but the monthly gains are tax-free. Ensure you invest in inflation-adjusted annuities, and be aware of every hidden cost and caveat. Variable annuities entail a one-time or series of payments to an insurance company. Depending on where your money is invested by the insurer (which you get to choose), your returns will vary depending on the performance of the instrument you chose.
Annuities are risky investments and involve high hidden costs. The North American Securities Administrators Association (NASAA) cautions that an estimated 44 percent of complaints received by state securities regulators are made by senior citizen investors. Of these, a staggering 31 percent of law enforcement actions comprise senior citizen investment fraud pertaining primarily to variable annuities and equity-indexed annuities (a combination of fixed and variable annuities products).
Money Market Accounts
CDs are low-risk investments – IOUs issued primarily by commercial banks – which yield a compounded rate of interest periodically. You can purchase short- or long-term CDs from your bank, broker or financial planner. Another option is to invest in U.S. Treasury bills (T-bills), which are short-term instruments that mature within a year. You could also invest in money market mutual funds such as Fidelity Cash Reserves (FDRXX).
Real Estate, Venture Capital, Private Equity
If you have the money and inclination to manage properties, investing in real estate for rental purposes might be a good idea. Alternately, you could invest in Real Estate Investment Trusts (REITs), which in turn invest in the real estate industry. REIT portfolios consist of both physical assets and derivatives such as collateralized debt obligations (CDOs).
Venture capital and private equity might be your cup of tea if your risk-tolerance threshold is high, you have ample capital that can be locked in over a long period of time, and you have access to information needed to make informed decisions when funding companies that may or may not succeed.