Nearly all investments fall into one of five broad asset class categories:
- Equities (stocks)
- Bonds (fixed income)
- Alternative assets (i.e., real estate)
- Commodities
- Money market (cash equivalents)
True portfolio diversification often necessitates at least some exposure to all these asset classes. The percentage breakdown of your asset classes should be unique to you, your risk tolerance preferences and the asset class investment opportunities currently available.
For example, a retiree may want to rely on their investments for consistent supplemental income to cover their living expenses. Real estate or high-dividend equities may be the ideal solution for their situation. A worker in their 30s who doesn’t rely on their investments for income might be more interested in portfolio growth. Their investments may be heavily weighted toward riskier equities that hold the potential for significant long-term appreciation rather than consistent dividends.
Getting the right asset mix in your portfolio isn’t always easy to accomplish on your own. If you have questions or just want a second opinion, don’t hesitate to contact the investment managers and retirement planners at Fullerton Financial Planning.
Stocks
Stocks, also known as equities, are ownership shares in a publicly traded company. Purchasing a stock makes you a shareholder and gives you the opportunity to share in the company’s success – or potential failure. Stocks provide wealth generation in two primary ways: capital appreciation (the value increases) and dividend payments.
Equities are not without risks, including things like market volatility and sector-specific challenges. In addition to asset class diversification, it’s usually in an investor’s best interest to have healthy stock diversification, which means holding equities in a variety of different industries, market caps and even geographic areas.
Bonds
Bonds are debt securities issued by governments, municipalities or corporations to raise capital. Investors who purchase bonds are technically lending money to the issuer in exchange for regular interest payments and the eventual return of the principal amount at maturity.
Conventional wisdom holds that bonds are a low-risk investment opportunity, making them ideal for retirees who are looking for opportunities to reduce their exposure to market volatility. Reality is more nuanced, as not all bonds share the same level of risk protection. The creditworthiness of the issuer and prevailing interest rates both play a role in bond safety, interest payments and valuation. However, the right mix of bonds can offer a stable income stream while providing portfolio diversification.
Alternative Assets
Real estate is a popular alternative asset investment for retirees, although other investments like private equity or luxury assets could also fall into this category. There is a diverse range of potential real estate investment opportunities for retirees and retirement savers, from owning rental properties to buying into real estate investment trusts (REITs). In addition to generating income via commercial or residential tenant payments, real estate can also appreciate. Like stocks, real estate values are subject to market forces and are not guaranteed.
Commodities
You don’t have to be well-versed or involved in mining, agriculture or natural gas to benefit from those industries.
Commodity trading allows retail investors to participate and potentially profit from the price movements of these physical assets.
There are a number of reasons why some investors include commodities like precious metals in their portfolio, including as a hedge against inflation. Like all other investments, there are inherent risks present in commodity trading, including geopolitics, demand dynamics and macroeconomic trends.
The good news is you don’t necessarily have to invest a lot of time and energy into learning about these industries and following these trends in order to invest in commodities. There are a variety of competently managed exchange-traded funds (ETFs) and commodity mutual funds that allow retirement savers to add commodities to their portfolios without a lot of investment micromanaging.
Cash Equivalents
Cash equivalents is an umbrella term used to describe a number of savings options that sacrifice traditional gains for stability and liquidity. There’s often a direct tradeoff between the two attributes. The more illiquid cash equivalents, like certificates of deposit (CD), have fixed terms and moderate interest rates, but they can usually be converted into cash quickly at the cost of sacrificing earned interest.
Others, like traditional savings accounts and money market funds, can essentially be turned into cash immediately with no penalty. Other examples of cash equivalents include things like T-bills, which are essentially government bonds that have maturities ranging from days to a year with virtually no default risk.
How Is Your Portfolio’s Asset Diversification?
Even experienced and financially savvy Phoenix retirement savers and investors can benefit from receiving a second opinion on their investments from an experienced investment manager. The team at Fullerton Financial Planning is always ready to help you understand your asset options and explain the benefits and risks of all types of investment strategies and asset classes. Call us today at (623) 974-0300 to speak with a financial advisor.
