For Help with Better Investing, Go to the Head of the (Asset) Class
You probably know that diversification is one key to long-term investment success. By putting a mix of investment types into a portfolio, you reduce your risks and increase the odds of market-beating returns over the long run.
When finance experts talk about diversification, they often think in terms of "asset classes." Asset classes are specific types of investments, such as stocks or bonds, for example. Often, when one asset class is down, one or more of the other classes is up. That's why diversification can help smooth out the rough patches in the market.
Want to think like a pro when it comes to investing? Then spend a few minutes learning about some of the most commonly held asset classes:
Stocks
Also known as equities, stocks are units of ownership in a company. Companies sell stock to raise money. So when you buy stock in a company, you're actually buying part of the company.
Stocks generally carry more risk than other investments. That’s why you may hear them described as aggressive or dynamic investments. But their earnings have historically been higher over longer periods of time, so they may help your retirement funds grow faster.
Real estate
When you think of purchasing real estate, you probably imagine yourself buying a house or a piece of land. Investing in real estate is different. When you choose this type of investment, your money goes into developed, rent-producing commercial properties — properties that may be in another city or state.
Historically, real estate investments don't go up or down much in value. CURRENTLY, not exactly true with the real estate fluctuations over the last year. But other factors can make real estate nearly as risky as stocks. In fact, real estate investments are usually described as dynamic investments. Your earnings can be high or low, depending on changes in property values and expenses and other risks inherent in real estate, such as economic conditions.
Bonds
When you buy a bond, you are loaning your money to a company or some other organization. In return for the loan, the bond issuer promises to repay the loan within a certain period of time, with interest. When this time is up — when the bond reaches its maturity date — the certificate can be redeemed for cash. However, before a bond reaches its maturity date, its value can fluctuate based on interest rate movement in the marketplace.
Bonds can be issued by companies, city and state governments and the federal government to raise money. Bonds are usually a less volatile investment than stocks, but they also usually offer a lower average return than stocks. You may hear bonds described as moderate-risk investments.
Cash equivalents
Conservative investments generally change less in value than others. These investments tend to have less risk, but also lower earnings.
Conservative investments all work a little differently. For example, money market investments are like short-term bonds, meaning you are repaid for your loan within a short period of time. In other words, you can get to your money quickly. Other examples of conservative investments are guaranteed interest investments and stable-value funds.
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