Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
If you've looked at pretty much any financial website lately, you've seen a lot of predictions and recommendations for how you should invest your money to generate the best returns for 2010 and beyond. But one thing that most of those recommendations ignore is a more fundamental question: whether those investments are even appropriate for you and your particular financial situation.
Stocks, stocks everywhere
I won't deny that buying stocks is one of the most interesting ways to invest your money. In many cases, the mere process of researching companies and deciding on the ones you believe have the greatest potential makes stock investing a personal investment as well as a financial one. You don't just want your stock to rise in value; you also want to see the companies you've invested in succeed and thrive. The fact that tens of thousands of Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) shareholders descend on Omaha each year to celebrate their company's achievements is perhaps the clearest example of this phenomenon, but it's certainly not limited to Warren Buffett and his disciples.
Regardless, that's not a feeling you're likely to get from buying a CD from your local bank or sticking your cash in a money market fund. But that doesn't mean that you can ignore those investments. In their own roles, they're just as important as stocks in ensuring that you'll have the financial security you need.
Keep your cash
For expenses that you'll have to pay within the next year, there's no substitute to keeping cold hard cash on hand. That doesn't mean stuffing your mattress with $20 bills, but having a money market fund or an FDIC-insured bank account can give you the same easy access while also providing a bit of income.
Right now, interest rates stink for savers. The best of a bad lot are high-yield savings accounts offered by banks like Capital One Financial (NYSE: COF ) and American Express (NYSE: AXP ) , but even they only pay around 1.5% to 1.6% right now. Yet you need to resist the urge to go after higher yields from riskier investments. They may pay off, but they may also end up costing you plenty if you have to sell at the wrong time.
This goes in the middle
Just because you have a year or more before you need money doesn't mean that you should feel comfortable having it in stocks. As we've seen throughout this decade, the stock market can stay depressed for years at a time -- and you don't want to have to rely on having perfect timing to avoid selling during a bear market.
For money you'll need in one to five years or so, bonds and similar fixed-income investments such as CDs make a lot of sense. Especially if you stick with Treasury bonds or bank CDs, you won't necessarily get a lot of interest these days, but your principal will be relatively safe. Stretching to include highly rated corporate bonds from issuers like Johnson & Johnson (NYSE: JNJ ) , Pfizer (NYSE: PFE ) , or ExxonMobil (NYSE: XOM ) may get you a bit more interest in some cases, but even the safest-looking companies have at least some risk.
Going for the gusto
For most investors, though, immediate needs are relatively small compared to the long-term demands on their money. Even those who are near retirement or have recently retired need to plan for 20 to 30 years of living expenses, the bulk of which are far enough away that keeping money in the stock market may make sense.
In fact, although it's been easy to forget over the past 10 years, stocks have greatly outperformed bonds and cash over the long haul. If you need your money to grow -- as most people do -- then stocks are where you'll want to have the bulk of your assets.
So in reading through the various year-end recommendations and predictions you'll see in the days and weeks to come, keep in the back of your mind the more fundamental issue of how to spread your money across different types of assets. Even though it may be hard to resist some of the stock suggestions you see, it's far more important to make sure you have all your bases covered rather than overextending yourself.
Small investors have a big advantage. Find out about one home-run stock that even Warren Buffett can't buy.