31/07/2014
People invest to grow their money in various asset classes depending on their risk appetite and time frame. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).
In addition to the three main asset classes, some investment professionals would add real estate and commodities, and possibly other types of investments, to the asset class mix. Whatever the asset class lineup, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.
Equities - Also called stocks, equities represent shares of ownership in publicly held companies.
Historically have outperformed other investments in the long term and most volatile in the short term
Fixed income - Fixed income, or bond investments, generally pay a set rate of interest over a given period, then return the investor’s principal.
Set rate of interest. More stable than stocks and value fluctuates due to current interest and inflation rates.
Money market - Money market investments are relatively safe, liquid short-term investments; examples include: government issued securities, CDs, banker’s acceptances, dollars and repurchase agreements (repo)
Less volatile than stocks and bonds. Lower potential for growth.
Guaranteed - Guaranteed assets with a fixed rate and backed by the claims-paying ability of the issuing insurer.Preserves your principal and provides at least a specified minimum return
Real estate - Your home or investment property, plus shares of funds that invest in commercial real estate.
Helps protect future purchasing power as property values and rental income run parallel to inflation
Values tend to rise and fall more slowly than stock and bond prices.
Commodities - Gold, silver, crude and renewable commodities like agriculture whose prices fluctuate according to demand and supply also fall in this category.
Gold is considered a safe haven but other commodities run according to the market tide. A risky asset class.
The most effective investment strategies involve diversifying investments across all the asset classes rather than focusing on specific securities that may or may not turn out to be "winners." Diversification is a technique to help reduce risk. It goes along with the age old saying "Don't put all your eggs in one basket".
