An asset class is a group of securities that have similar financial
characteristics, behave similarly in the marketplace, and are subject to the same
laws and regulations. The three main asset classes are equities, fixed-income
and cash equivalents. In addition to the three main asset
classes, some investment professionals would add real estate and commodities,
and possibly other types of investments, to the asset class mix. Whatever the
asset class lineup, each one is expected to reflect different risk and return
investment characteristics, and will perform differently in any given market
environment. Asset classes and asset class categories
are often mixed together. In other words, describing large-cap stocks or
short-term bonds asset classes is incorrect. These investment vehicles are
asset class categories, and are used for diversification purposes.
Stocks - Also called equities Represent shares of ownership in
publicly held companies Historically have outperformed other
investments over long periods Most volatile in the short term
Returns and principal will fluctuate so that accumulations, when redeemed, may
be worth more or less than original cost Fixed income - Fixed income, or bond
investments, generally pay a set rate of interest over a given period, then
return the investor’s principal. Set rate of interest
More stability than stocks Value fluctuates due to current interest
and inflation rates Money market - Money market investments
are relatively safe, liquid short-term investments; examples include:
government issued securities, CDs, banker’s acceptances, euros and
commercial paper. Less volatile than stocks and bonds
Lower potential for growth Short-term investment
Guaranteed - Guaranteed assets with a fixed rate and backed by the
claims-paying ability of the issuing insurer.
Preserves your principal Provides at least a specified minimum
return Real estate - Your home or investment
property, plus shares of funds that invest in commercial real estate.
Helps protect future purchasing power as property values and rental income run
parallel to inflation Values tend to rise and fall more slowly
than stock and bond prices. It is important to keep in mind that the real
estate sector is subject to various risks, including fluctuation in
underlying property values, expenses and income, and potential environmental
liabilities. Most financial experts agree that some
of the most effective investment strategies involve diversifying
investments across broad asset classes like stocks and bonds, rather than
focusing on specific securities that may or may not turn out to be "winners."
Diversification is a technique to help reduce risk. However, there is no
guarantee that diversification will protect against a loss of income.
The goal of asset allocation is to create a balanced mix of assets that
have the potential to improve returns, while meeting your:
Tolerance for risk Goals and investment objectives
Preferences for certain types of investments within asset classes
Being diversified across asset classes may help reduce volatility. If you
include several asset classes in your long-term portfolio, the upswing of one
asset class may help offset the downward movement of another as conditions
change. But keep in mind that there are inherent risks associated with investing
in securities, and diversification doesn’t protect against loss.
References ^ TIAA-CREF. "TIAA-CREF - Asset
Classes". tiaa-cref.org. Retrieved 2014-02-28.
^ "Asset Class Definition | Investopedia". investopedia.com.
Retrieved 2014-02-28.