What Are the Basic Asset Classes?

Transcript

This is Michael Sayre, your 401(k) advisor here at CUI Wealth Management, your retirement plan partner. Today I want to talk about asset classes. Understanding asset classes is essential when investing because sometimes we have this ambiguous idea that we're all in or out of the stock market. When you turn on the news, you'll see different charts showing the S&P 500, Dow, or NASDAQ. And that'll give you an idea of how those markets are doing. But, to understand what's appropriate for investing in, it's essential to understand the different types of asset classes.

There are three basic main types of asset classes that you're going to see when you're investing. This includes cash or cash alternative, stock or equity, and bonds or fixed income. The allocation of these types of investments will impact what to expect when investing. We're not going to get into the nitty-gritty because you can divide those into other categories, but today let's talk about high-level what those look like. Let's start with cash.

We're familiar with cash because we bank in cash and use it for our day-to-day purchases. Inside a portfolio, it's very similar. You're going to see money markets classified as cash; you're going to see cash alternatives; you're going to see a stable value fund in a 401(k). Cash primarily reduces risk and gives up the potential for higher returns for lower risk and the possibility to buy other assets.

The second is stocks or equities. Stocks or equities are on the other side of the spectrum regarding risk. There's higher risk but also a higher potential for a return. And this is because you purchase company shares when investing in stocks or equities. In a 401(k), you're generally not buying individual stocks. You're usually going to purchase a fund.

Equities are ownership in companies, and there are different types of companies. Those different company types have various risks. There are different sizes of companies, and those come with various risks as well. We have cash on one side and stocks or equities on the other. Those are two of the three basic primary assets.

The third asset class is bonds or fixed income. Fixed income comes from the idea that you invest in fixed income, and you generally receive fixed income payments. That's because bonds are loans. You loan out your money to a government or a corporation, and just like any other loan, payments are made based on an interest rate.

There are different credit ratings, so entities with a better credit rating may pay a lower interest rate and generally have less volatility. Those with lower credit interest rates will typically pay a bit higher because of the credit risk, but there can be more volatility.

Those are your basic high-level three types of assets. You've got cash, bonds or fixed income, and stock or equities. Usually, in a portfolio, you're going to have a fund that either has a specific goal or you're going have a mix of those different types of asset classes to fit your needs based on your risk tolerance and time horizon.

I hope this has been helpful. We'll do more of these in the future. Once again, this is Michael Sayre with CUI Wealth Management, your retirement plan partner.