Asset Classes – Part 1

There are many types of assets to invest or trade that can be chosen according to risk tolerance, market factors, capital available etc.

The most common classes are listed below:

Cash
Fixed interest securities e.g. Bonds: junk; government; corporate; foreign; convertibles; MBSs
Stocks: preferred; large-cap; mid-cap; small-cap; micro-cap; public; private; foreign; emerging
Real Estate: REITs
Commodities: agriculture; energy; water; precious metals; industrial metals
Derivatives: long; short; market neutral; options; futures; swaps; forwards; OTCs

Cash: If you are going to be using cash for your investments, you need to be aware of the various disadvantages associated with it. One of these is the fact that it does not earn any interest in itself. It can also lose its value in a period of high inflation, affecting its capability to be exchanged for services and goods.

Another disadvantage is that it can be difficult to handle or transport in large quantities. It is also subject to risks like fire and theft. However, using cash has many advantages, too. It is accepted by most people in exchange for goods or services. It is also the standard of value that is used in modern society. Furthermore, it is more efficient to use in purchasing items when compared to bartering because of its portability.

20120107-170828.jpg

Bonds

A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.* In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.

It is always prudent for an investor to maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Bonds help you to diversify your portfolio, thereby, reducing your risk exposure.

Investing in bonds provides a predictable stream of income and repayment of principal.

Some of the negative aspects of investing in bonds are:

When interest rates go up, the price at which the bond can be sold goes down. If you are forced to sell the bond due to pressing circumstances, you may not back the entire amount invested resulting in losses.

Long-term bonds can tend to be volatile and can somtimes fail to keep up with inflation.

20120107-174504.jpg

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s