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Asset Class Review DIRECTNEWS FALL 2012 specific assets, such as real estate. Bonds, like most loans, are fixed income investments that pay interest on the amount invested and repay Asset Class principal at maturity. Review When you invest in a bond fund, your money is in a fund that invests in and trades multiple bonds. Bonds can be sold before they mature and have a market value that goes up and down. The primary reason for the rise and fall of bond prices is changing interest rates; bond prices generally go up A diversified investment portfolio is made up of a variety of when interest rates fall and go down when interest rates rise. different types of investments. How a portfolio arranges these different types of investments to fit together is called asset There are different types of bond funds. Bond funds with shorter duration allocation. But what exactly are the asset classes, or asset bonds may fluctuate less in value but also provide a lower long-term categories, used to create a complete portfolio? In this article, return, whereas longer-duration bond funds are likely to be more volatile we’ll review several of the major asset classes and how they fit and have a higher long-term return potential. High yield bonds, also called into the bigger picture of your portfolio. junk bonds, invest in bonds issued by corporations with lower credit ratings than investment-grade corporate and government bonds. Because Money market funds in a nutshell: high yield bonds pay a higher yield, high yield bond funds have a higher Conservative long-term return potential, but these bonds also carry a greater risk of default, making these types of bond funds riskier than other bond funds. Low risk, low return Stable What purpose does a bond fund serve in a portfolio? Bond funds are an important part of an investment portfolio. Think of them What is a money market fund? as the center of the portfolio: their goal is to provide stability, income, and Money market funds are the most conservative type of capital appreciation. This combination is intended to provide higher returns investment you will find in a portfolio. Money in a money over time than stable value and money market investments. Bonds are market fund rarely changes much in value, maintaining close usually thought of as part of the more conservative, low-volatility portion of to a $1 per share value. It typically earns a low interest rate a diversified portfolio. over the course of the investment. While money market funds are considered stable investments with low volatility, they are U.S. large company stock funds in a nutshell: still subject to the financial stability of the governments, banks, Moderately aggressive insurance companies, or corporations that guarantee or offer the individual securities. Moderate-to-high risk, moderate-to-high return Will likely fluctuate in value, with many ups and downs What purpose does a money market fund serve in a portfolio? What is a U.S. large company stock fund? The asset class represented by money market funds can be Stocks, also called equities, represent ownership in a company. Investing important to a portfolio. Think of it as the anchor of the in stocks is buying equity ownership. Stocks are often defined by the size portfolio—the part that remains the same even during times of of the company issuing the stock. U.S. large company stocks are volatility in other asset classes. Because a money market fund companies based in the United States that have a market capitalization provides little return, the portion of a portfolio invested in a (total number of outstanding shares multiplied by the current stock price) money market fund emphasizes preservation of capital and greater than $10 billion. Large companies are often names you’d recognize usually represents the most conservative slice of the portfolio easily, such as Microsoft, Disney, and Coca-Cola. pie. Stocks do not promise a return on your money at any given time and are Bond funds in a nutshell: considered a higher-risk investment because they are backed only by the Moderately conservative value of a corporation. Stocks may experience a high degree of volatility, or up and down movements in value. However, stocks also have a greater Moderate risk, moderate return long-term return potential than bonds or money market funds. U.S. large May fluctuate somewhat in value company stock funds, because they are generally stocks in established companies, do not have some of the additional risks of stocks in smaller What is a bond fund? companies or companies based outside of the United States. Therefore, Bond funds are categorized as the “fixed income” asset class. U.S. large company stocks are considered to have moderate-to-high risk. Bond funds are typically considered to have low to moderate risk — they are less risky than stocks but not as stable as money market funds. When you invest in bonds, you buy a government’s or corporation’s debt. Some bonds are backed by DIRECTNEWS FALL 2012 What purpose does a U.S. large company stock fund serve on the lower-risk end of the stock spectrum, U.S. small company stock in a portfolio? funds are at the higher-risk end of that spectrum. A conservative or The goal of a U.S. large company stock fund is long-term moderate portfolio may invest little to no assets in U.S. small company growth of capital by investing in large, financially established stocks, whereas a more aggressive portfolio may include a higher companies. Risk and return are typically moderate to high. All allocation to small company stocks as a portion of its more aggressive stock funds are considered part of the more aggressive portion stock investments, which may also include international stock funds. of a portfolio, but U.S. large company stock funds are on the lower-risk end of the stock spectrum. In a conservative or International and global stock funds in a nutshell: moderate portfolio, U.S. large company stocks may make up Aggressive the majority of the stock investments of a portfolio, whereas in High risk, high potential for return a more aggressive portfolio, U.S. large company stocks may be Will likely fluctuate in value, with many ups and downs a smaller part of a mix of more aggressive stock investments such as small company or international stock funds. Diversifier from U.S. stock funds U.S. small company stock funds in a nutshell: What is an international or global stock fund? International or global stock funds are primarily made up of the stock of Aggressive companies based outside of the United States. Unlike emerging markets High risk, high potential for return stocks, international or global stocks typically refer to stocks of companies Will likely fluctuate in value, with many ups and in developed nations such as European countries and Japan. downs International and global stocks are considered more aggressive than U.S. What is a U.S. small company stock fund? stocks. There are often additional risks to investing outside of the United U.S. small company stocks are from companies based in the States, including political and economic risks, currency risks, and reporting United States that have a market capitalization (total number of and security differences in foreign markets. On the other hand, outstanding shares multiplied by the current stock price) of less international and global stocks often have a high potential for growth. than $2 billion, considered to be small companies. U.S. small company stocks are considered more aggressive than large cap What purpose does an international or global stock fund serve in a stocks. Whereas U.S. large company stock funds may have portfolio? somewhat lower risk because they tend to include established The goal of an international or global stock fund is long-term growth of companies, small company stocks have greater risk because capital by investing in companies based outside of the U.S. Risk is the small companies included may be just getting established. typically high with a high potential for long-term return. All stock funds They could be small, start-up companies, or companies early in are considered part of the more aggressive portion of a portfolio, and while their growth cycle. The uncertainty of small company U.S. large company stock funds are on the lower-risk end of the stock businesses results in a high degree of risk, but small companies spectrum, international and global stock funds are at the higher-risk end of also often have greater potential for growth than larger that spectrum. But international and global stock funds offer more than just companies which have already reached a zenith. another aggressive investment; they provide a diversification opportunity, since international markets may experience different movements from U.S. What purpose does a U.S. small company stock fund serve markets. Therefore, even though they are more aggressive, even a in a portfolio? conservative or moderate portfolio may include a small allocation to The goal of a U.S. small company stock fund is long-term international or global stock funds. A more aggressive portfolio may growth of capital by investing in small companies. Risk is include a higher allocation to international and global stocks as a portion of typically high with a high potential for long-term return. All its more aggressive stock investments. stock funds are considered part of the more aggressive portion of a portfolio, and while U.S. large company stock funds are © 2012 Arnerich Massena & Associates, Inc. Reprinted by permission. Conservative Aggressive Money Market Bonds U.S.
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