For beginners, investing can be overwhelming at first due to the thousands of choices available in the market for you to invest your funds. It can be challenging to decide which assets will fit your investment strategy. Some asset classes have more risk than others. The following is a list of the most important asset classes, in order of least to most risky.
One of the easiest asset classes to comprehend for beginner investors is cash deposits in a bank. Cash is advantageous since you will know exactly how much interest you will earn from the bank. In addition, you have assurance you will be able to receive your capital back from the bank whenever you need it. However, the interest earned on cash in the bank rarely outpaces the rate of inflation.
Certificates of deposit (CD)
Another similar asset to cash is certificates of deposit (CDs) which also have a high level of liquidity. The advantage of CDs over cash is that CDs usually offer a higher interest rate. On the other hand, with CDs, your money is locked away for a specified period of time. Also, you will usually be charged a fee for withdrawing your funds early with CDs. CDs don’t necessarily keep up with inflation.
A bond is a type of investment asset which is essentially a way for you, as the investor, to loan money to a company or government in exchange for a return of interest payments along with your originally invested funds. Generally, bonds will offer higher interest rates of return than keeping cash in your bank account. However, there is slightly elevated risk from the possibility of the bond issuer not being able to pay back the loan due to unforeseen financial circumstances.
This type of investment is essentially more than one investor pooling together capital in order to invest in securities of various types, usually stocks and bonds. Mutual funds are managed by professional portfolio managers. Mutual fund investors can invest into a group of over a hundred different assets in a diversified portfolio with as little as $1,000.
Exchange traded funds (ETFs)
Similar to mutual funds, exchanged traded funds (ETFs) are an investment vehicle which allows people to invest in a group of assets without having to purchase each individual asset separately. However, ETFs are not actively managed by portfolio managers, like some mutual funds are. Instead, ETFs are designed to mimic and represent the economic performance of a specific industry or geographic region. You can buy and sell ETFs just like you would with stocks and bonds, except with ETFs you can control a diversified group of assets with just a single market position.
An individual stock is a way for people to invest in a specific company which has issued shares for the public market. Stock shares represent proportional ownership in the issuing company which entitles the shareholder to gain from the company’s economic performance. Individual stocks can be riskier and more volatile than other types of asset classes such as cash, bonds, or mutual funds. However, with more risk comes more potential for larger gains with stocks.
There are many assets which are considered riskier but also come with higher potential gains. This will include real estate, real estate investment trusts (REITs), hedge funds and private equity funds. Commodities are also a more volatile asset with increased potential for appreciation in value.
Personalize your investment portfolio
Now that you have learned about the basic asset classes, you may be ready to start building your investment portfolio. You should make sure to customize your portfolio to fulfill your personal financial needs, investment goals and tolerance for risk. Utilizing a professional financial advisor is a great way to build a portfolio for both your short-term and long-term goals.
Any opinions are those of Independent Financial Services and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Alternative investments involve substantial risks that may be greater than those associated with traditional investments and are not suitable for all investors. These risks include, but are not limited to limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in alternative investments if they do not require a liquid investment and can bear the risk of substantial losses. There is generally an inverse relationship between interest rate movements and bond prices. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT’s will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.