Minimize Portfolio Risk Through Asset Class Selection

An asset class is a group of securities that have similar characteristics and market tendencies. Most financial experts advise investors to diversify portfolio components across multiple asset classes in order to minimize risk and stabilize returns. While the three primary asst classes are stocks, bonds, and money market instruments, some investment professional add other options to further diversify a portfolio.

Building a Diversified Portfolio Through Asset Allocation

Asset allocation is the process of distributing investment dollars across multiple investment categories in an effort to maximize investment returns while minimizing risk and swings in performance. For most investors, risk is a function of time as younger investors are able to take on more risk (they have more time to recover from setbacks). However, all investors are generally encouraged to develop and adhere to an investment strategy that is consistent with their objectives and timeframes and review their holdings on an annual basis to re-balance allocations as needed.

Types of Asset Classes

The primary asset classes include:

Equities: Equities, more commonly referred to as “stocks”, provide investors with shares of ownership in public companies. Though more risky than other types of investments, stocks have historically outperformed all other asset classes over time. Stock investment returns can and do fluctuate and their value at the time of sale can be higher or lower in value than the initial investment.

Fixed Income: Fixed income investments, more commonly referred to as “bonds” typically offer a set interest rate over the defined life of the bond, along with the re-payment of principal at the time of redemption (maturity). Though generally viewed as less risky than stock investments, the value of bonds fluctuate in response to interest rate changes.

Money Market: Money market investments are short-term and relatively safe vehicles that can provide the backing of the U.S. government. Money market investments can include U.S. Treasury issues, CDs, and short-term commercial paper.

Other Asset Classes: Real estate and several other investment options comprise the other types of asset classes for investors to consider. For many investors, real estate is particularly interesting since its returns can help diminish the impact of inflation on a portfolio.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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