Asset Classes - Going Back To School
It is time to attend classes; in the world of investing, those “classes” are asset classes. Each class is a type of investment, and financial professionals tend to agree that there are four distinct asset classes: stocks, bonds, money markets and real estate. When used correctly, each asset class is a valuable tool to the investor in order to build a successful portfolio. We will focus the majority of our attention on the stock market. These asset classes include:
Real estate is land plus anything permanently fixed to it, including buildings, sheds and other items attached to the structure. It is a unique investment because its value is directly related to the properties surrounding it.
Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free.
Bonds are certificates of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date. These are very stable, slow-growing investments and can serve as bedrock for any long term investing portfolio.
Stocks are the basic unit of ownership in a company. Stocks entitle their holder to the benefits of an owner, namely dividends and voting rights.
The Value of Stocks in a Diversified Portfolio
At the risk of oversimplifying things, real estate, money markets and bonds can provide stability in a diversified portfolio; but stocks can provide the big money. These investment options include more stock volatility and risk but the returns can be incredible. You can diversify your portfolio with the different asset classes but you can diversify your stock holdings individually as well. Your stock portfolio can, and should, include small cap stocks, mid-cap stocks, large cap stocks, utilities and the like. Having stocks of different types and from different stock sectors provides a security that is lacking if diversity is lacking.
Many financial experts discuss stock market strategies and asset classes are an important part of any such discussion. Investing in the four asset classes allows the successful investor to take advantage of the strengths of the various classes. A portfolio that only has one or two different asset classes is more vulnerable to volatility or changes in that particular area. Since these asset classes move independently, they tend to have highs and lows at different times, which enhance portfolio diversification to protect portfolios.
Whether discussing the stock market or investing in general, asset allocation is a critical part of any discussion. For stocks, it is imperative that asset classes and portfolio diversification are a part of any stock trading plan.