Investments are all about the future:

• If you buy a bond, can the company or municipality pay the coupon?

• If you buy a stock, do you know enough about the company to feel they will be able to become more valuable as time goes on?

      If you buy a mutual fund, you are either buying a manager or the market index or sector. Does the manager have a good track record? Do you feel the sector or the market index has a good future?

Buying the investment based on one year past returns makes as much sense as driving by looking in the rear view mirror. How has this investment performed in the longer term? Has it done well in all kinds of markets and interest rate environments? Is the company adept at producing consistent performance or have they just been lucky last year? Is the investment at an all time high? Can it go higher?

Once your goals, strategy and portfolio are in place, choosing investments becomes a lot easier.

The basic categories of investment in the stock market are stocks (or stock funds), or bond's (or bond funds), and Cash. Mutual Fund choices can be broken down into one or a combination of stocks and bonds or cash.

Inside of these categories, portfolios are further diversified by geography, and size and type of the company or government entity.

Stocks

Stocks are pieces of ownership in a company. Your fortunes rise and fall with the company's fortunes. Your stock has a potential for great gain or could go to zero. Picking individual stocks requires analysis and market understanding.

Choosing stock funds is an easy way to diversify your holdings to several companies.

Bonds

Bonds are loans from a company or government entity. They pay you interest to use your money. If you hold the bond for the duration of the period and the company or government doesn't go bankrupt, you will get the stated return.

The stated return is the amount you invested plus the coupon rate.

Bonds are often traded before their due date on the market. When buying or selling bonds on the market, they are valued at their relative worth to other available bonds. After all, in the market you must have a willing seller and a willing buyer to do the deal.

The more solid the lender, the less interest they will offer for their bonds. The U.S. government prints the money. They are considered the strongest lender possible. They pay low interest.

The shakier the lender, the more interest they will offer. These bonds are sometimes called high-yield or junk bonds.

Cash

Cash instruments save you from the possibility of losing principal, but your cash investments may not keep up with inflation. Cash includes money market funds, CD's and savings.

CDs and Savings Accounts are taxable.m Money Markets can be taxable or tax-free. Generally, you need to be in the 28% or higher tax bracket to come out ahead with a tax-free money market fund because they pay lower interest than a taxable fund.

Business investments

Business investments come in the form of active and passive ownership. Active ownership means you are making the business happen. Passive ownership often takes the form of Limited Partnerships. This means you have invested money in the potential growth or income from a business. If you have a Limited Partnership interest in a mobile home park, your investment gain will be based on the occupancy and rents and expenses of that mobile home park.

Selling Limited Partnerships can be difficult because you need to find a willing buyer. Unlike the stock market, there is no obvious place to look for your buyer. Business ownership and limited partnerships are therefore less liquid.

Real estate

Real estate ownership takes the three forms:

      Actively owning investment property, which means you are a landlord or you hire one.

      Owning a REIT, Real Estate Investment Trust. REITS may be traded on the stock market or privately held. Owning a REIT means you hold shares in several properties and get income from those ventures. REITS are a good liquid way to get the diversification of real estate in your investments.

      Living in and selling homes. Some people make money by buying, living in, fixing up, and selling their homes for a profit. This is, in effect, a business.

Barbara Bachelder, CFP® for Wealth by Design, LLC