Understand the different types of assets that make up a well-rounded investment portfolio.
Whether it’s stocks, bonds, cash or alternative investments, different asset types can play a key role in building a well-rounded portfolio. However, while each type of investment has its place, not every investment is right for every investor.
We can help you create a diversified investment portfolio with a customized asset allocation strategy that reflects your unique needs, goals and risk tolerance. Here’s a broad overview of the four major asset classes — and the role they can play in creating an investment portfolio that works for you.
In this article:
Stocks
How they work: Also known as equities, stocks are an ownership stake in a company that you can purchase. Over time, as a company’s performance and profits increase, the stock price may also rise, allowing you to earn money by selling your shares for more than you paid for them. In addition, many companies distribute a portion of their revenues to shareholders by paying a dividend. There are many types of stocks, which are often categorized by size, industry or certain characteristics.
Advantages: Though the performance of stocks differs among companies and industries, stocks have historically provided a higher annual return than bonds or other types of investments.
Risks: Stocks often come with more risk and volatility than other types of investments. For example, their value can decrease if the company’s performance deteriorates. Further, while stocks have historically yielded high returns, past performance is not a guarantee of future results.
Learn more: What are the different types of stocks? An investors guide
Bonds and fixed income
How they work: When you buy a bond, you are essentially loaning money to the bond issuer — usually a company or government — in exchange for regular interest payments for a set period. When the bond matures, you are repaid the principal value of the bond. Some of the most common types include corporate bonds, municipal bonds and government bonds.
Advantages: Bonds are often prized for their stability due to their low-risk nature, and the steady and predictable income stream they can offer investors. In addition, some bonds, such as municipal bonds, have certain tax advantages.
Risks: Bonds typically have a lower return than other investments. What’s more, bonds are not without risk. Among the top considerations is interest rate risk (when interest rates increase, bond prices generally decrease — and vice versa) and default by the bond issuer (which can result in the investor losing out on principal and interest payments).
Learn more: What to know about bonds and fixed income investing
Cash and cash equivalents
How they work: The term “cash” is broadly used to describe safe, typically short-term liquid holdings. There are many different types of cash investments available, with some of the most common being checking and savings accounts, certificates of deposit (CDs), money market funds and short-term U.S. Treasuries.
Advantages: The primary advantages of cash and cash equivalents are its low-risk nature and liquidity. The risk of losing your principal is often low with these investments and investors can usually tap into these investments easily. Due to their liquidity and accessibility, cash vehicles are often the primary source to pay for emergency expenses, as well as to achieve short-term investing goals.
Risks: The chief drawback is the limited opportunity for growth, as cash investments tend to have the lowest returns of any major asset class over the long term. Additionally, there is inflation risk: when inflation outpaces the purchasing power of the income or returns from an investment.
Learn more: How much cash should I have in my portfolio?
Alternative investments
How they work: Once a catchall for investments that didn't fit into traditional categories, alternative investments now include a host of increasingly popular assets, including private equity and hedge fund offerings, private real estate placements, managed futures, art and antiques, commodities and derivatives.
Advantages: Alternative investments generally have a higher return potential compared to traditional assets. Some alternative investments also have low correlations to traditional investments such as stocks and bonds, which means they can help diversify an investment portfolio and reduce overall portfolio risk.
Risks: Alternative investments are not for everyone. The potential for higher returns often comes with more risk, a high degree of complexity and limited accessibility. Alternative investments also typically come with higher fees and expenses compared to traditional investments. Finally, depending on the investment, they can require substantial capital and be highly illiquid.
Learn more: What are alternative investments?
Let’s create the appropriate mix for you
We can help you create a personalized and diversified portfolio that includes a mix of assets that makes sense for you, your unique needs and overall financial goals.