Asset Classes 101

There are multiple types of asset classes, each with its own rules, risks, and types of investors. Before you invest, here are some characteristics of three asset classes and their ideal investors.

Stocks: Investing For Growth

Stocks are a growth investment, which means they seek to increase your money over time. You can either invest directly in a stock, or invest in a mutual fund that owns stock. When you invest in mutual funds that own stock, your mutual fund actually buys part ownership in the companies it invests in.

Stock also relies heavily on the company. If you buy a stock in a company that ends up doing well, the share price could increase. This would lead to a profit on your part if you chose to redeem your shares then. Conversely, if the company does not do well, or even if the stock market suffers, the price of the stock can drop. In this way, stocks tend to fluctuate often.

Although stocks have a high investment risk, historically they have provided the highest returns across time. It is essential to remember, however, that past performance is no guarantee of future results.

Should you invest in stocks?

Stocks are a good option for investors in it for the long run. This means stock investors should intend on not needing their money for roughly seven years or more. Stock investors must also be comfortable with the inherent investment risk of stocks.

Bonds: Investing For Income

Bonds are an income investment. Income investments provide a steady stream of income paid out on a schedule. You can buy bonds individually, or invest in a mutual fund that buys bonds. When you invest in mutual funds that buy bonds, your mutual fund lends money to the companies or governments that issue said bonds. The issuers promise to repay the fund’s loan with interest.

Bonds fluctuate as well, usually in reaction to interest rates. If interest rates decrease, the market value of an issued bond increases. If interest rates increase, the market value of an issued bond decreases.

Since the risk of fluctuation has more to do with interest rates, the risk on bonds is average. Since the return on investment acts like income, the potential return of bonds is also average.

Should you invest in bonds?

Bonds are a good option for investors willing to accept moderate risk. They are also best for investors who may not need their money for three to seven years.

Short-Term Investments: Investing For Capital Preservation

Short-term investments do not add to your wealth, but rather act to preserve the money you already have. When you buy short-term investments, such as money market funds, certificates of deposit (CDs), and Treasury bills, you are lending money to the issuers for a short period of time, usually less than a year.

Unlike bonds and stocks, short-term investments are usually stable. They also tend to provide a steady rate of return. Because of this, they have a low investment risk. However, they also provide lower returns than stocks or bonds over time.

Should you make a short-term investment?

Short-term investments are a good option for conservative investors who may not need their money for one to three years. They are also for investors who are willing to accept the risk of not keeping up with inflation, or else to balance a more aggressive portfolio.

With such varied asset classes, it can be difficult to choose which one is right for you. Focus on the length of your investment and what you are willing to risk, and you are sure to find the best asset class for you.

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