Basic Asset Classes
Say your family goes to a local amusement park once a year. Chances are good that there are a few rides someone will sit out on. Maybe you don’t like the big roller coasters. Maybe your teenage son has outgrown the merry-go-round.
By the same token, each investment has a level of risk associated with it. Higher risk investments are like a roller coaster–they require a stronger stomach, but the thrill is much greater. Lower risk investments, on the other hand, may just be too sedate for some investors.
Asset Allocation Choices
There are 3 main investment categories, also known as asset classes:
- Stocks: represent ownership in a company and generally offer the best growth opportunities over the long term, as well as the highest risk.
- Bonds: represent your loan to a government or corporation and generally offer steady, fixed income and medium risk.
- Cash: represented by short-term instruments, cash provides more protection for your investment but less opportunity for growth as the lowest risk asset class.
Individual Investment Choices
The following roster of investment choices covers the spectrum from the most conservative to the more high-risk–yet potentially higher return–investments.
- Savings Preservation/Low Risk: Cash/money market accounts
Short-term fixed accounts
Certificates of deposit (CDs)
- Income Potential/Medium Risk:
Fixed account options
- High Growth Potential/High Risk:
Large capitalization (large cap) stocks
Mid cap stocks
Small cap stocks
Real estate investment trusts
Capital appreciation stocks
Emerging markets stocks and bonds
- Basic Asset Classes
- What is Asset Allocation?
- What is Asset Rebalancing?