Assets make you wealthy because they can generate income, which can grow over time through a process called compounding. The specific assets you invest in will depend on your individual financial goals, timeline, and risk tolerance. Today we will be looking at an example of a well-diversified portfolio that includes a mix of the following five asset classes.
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- Stocks. Stocks are a fundamental part of investing. When you buy stocks, also known as equities, you are essentially buying a small piece of ownership in a public company. As the company grows and becomes more profitable, the value of your shares should increase. You may even be entitled to receive dividends, which are payments made by the company to its shareholders. To buy stocks, you need to open an investment account. You can choose between a tax-advantaged account, such as an individual retirement account IRA, or a taxable brokerage account.
There are four main types of stocks, growth stocks, value stocks, dividend stocks, and blue-chip stocks.
- Growth stocks are companies that are growing their revenues, cash flow, and earnings at a much faster rate than their peers. They are often seen as riskier investments, but they have the potential to generate high returns.
- Value stocks are companies that are trading for less than their intrinsic value. Intrinsic value is the theoretical price of a stock based on its underlying assets, liabilities, and future earnings potential. Value stocks are often overlooked by investors, but they can offer significant potential for capital appreciation.
- Dividend stocks are companies that pay out a portion of their earnings to shareholders in the form of dividends. Dividend stocks can provide a steady stream of income, and they can also be a good way to grow your wealth over time.
- Blue-chip stocks are the stocks of large, established companies that have a long history of profitability and dividend payments. Blue-chip stocks are relatively safe investments, and they can be a good way to build a foundation for your portfolio.
- Bonds.
Bonds are a type of loan that corporations and governments issue to investors. When you buy a bond, you are essentially lending money to the issuer. In exchange, the issuer agrees to pay you interest payments over a set period, and then repay your initial investment at the end of the term.
Bonds are generally considered to be less risky than stocks, but they also offer lower returns. This is because bonds are a safer investment, as the issuer is legally obligated to repay the loan. However, if interest rates rise, the value of bonds can decrease, as new bonds will be issued with higher interest rates.
There are two main ways to buy bonds, directly from the issuer, or through a brokerage account.
- Mutual funds. A mutual fund is a type of investment that pools money from many investors and invests it in a variety of securities, such as stocks, bonds, and other assets. The combined holdings, known as a portfolio, are managed by experienced financial professionals.
There are several types of mutual funds such as
- Stock mutual funds. A stock mutual fund is a collection of stocks chosen by a professional money manager. The fund is typically designed to track a market index, such as the SNP 500.
- Bond mutual funds. Bond mutual funds invest solely in bonds. These funds provide stability to an investment portfolio and typically have lower returns than stock mutual funds.
- Balanced funds. These mutual funds own a mix of both stocks and bonds, typically with a fixed asset allocation such as 60% stocks and 40% bonds.
Mutual funds offer a number of advantages over investing in individual securities. First, mutual funds allow you to diversify your portfolio, which can help to reduce risk. Second, mutual funds are professionally managed, which can save you time and effort. Third, mutual funds offer a variety of investment options to choose from, so you can find a fund that meets your specific needs.
- Cash. When financial professionals talk about cash as an investment, they are not referring to actual bills and coins. Instead, they are referring to cash equivalents, which are short-term investments that can provide stability to your investment portfolio.
Some common examples of cash equivalents include
- Money market funds. These are mutual funds that invest in short-term debt securities, such as government bonds and corporate bonds.
- Treasury bills. These are short-term debt securities issued by the US government.
- Certificates of deposit CDs. These are deposit accounts that offer higher interest rates than savings accounts. CDs have terms ranging from a few months to several years.
Cash equivalents are a good option for investors who have short-term financial goals, such as saving for a down payment on a house or paying for a child’s education. They are also a good option for retired investors who do not want to take on a lot of risk.
You can invest in cash equivalents through banks, TreasuryDirect.gov, or some brokerage firms.
- Exchange-traded funds ETFs are similar to mutual funds in that they pool money from investors to buy baskets of securities. However, ETFs are traded on stock exchanges like stocks, so they can be bought and sold throughout the day. This makes them a more liquid investment than mutual funds, which are only priced once a day at the end of the trading day.
ETFs can track market indices, such as the SNP 500, or they can be focused on particular sectors, such as foreign energy companies or domestic technology securities. They tend to have lower investment minimums than mutual funds, so they are a good choice for new investors without a lot of cash on hand.
You can buy ETFs through brokerage accounts and employer-sponsored retirement plans.
There are also other types of assets you can invest in which we will discuss in other videos.
I hope this video helps you in being one step closer to your financial goals.
Reference: https://www.forbes.com/advisor/investing/types-of-investment-assets/
