Become a savvy investor – Are your eggs in one basket?

Part 1- Asset Classes

Taking the first step towards beginning an investment program can be intimidating. There are some basic terms and theories that you should familiarize yourself with before you make any investment decisions, like jumping into your company’s 401(k) program. We’ve outlined the most important investing concepts below, which will help you on your way towards planning for the future. Over the next two days, we’ll be talking about how different asset classes and diversification can help you shape your asset allocation.

Asset allocation is a term you’ve probably heard before, but perhaps didn’t entirely understand. So what is asset allocation exactly, and why is it important? To begin with, it is the most crucial investment decision you will make. Asset allocation refers to the percentage of assets you are going to invest across different asset categories or classes, such as stocks, bonds, and cash.

Asset Classes

Stocks (also known as equities) represent a share or ownership interest in a company. When the company does well, you would expect the stock price to rise and you would benefit as a shareholder. Companies may pay dividends to their shareholders, either in the form of cash or more shares of stock. Similarly, if a company does poorly, you would expect the stock price to decline. In general, stocks or equities are considered investments that have both higher risk and higher return.

Bonds (also known as fixed income) represent a loan that you have made to an entity such as the U.S. Government, your local school district, or a company. Bonds typically involve interest payments from the bond issuer (one of the entities mentioned above) to you, the bondholder. When the bond matures at a set point in time, you receive back the initial principal that you loaned the issuer. Bondholders do not receive additional compensation at maturity if a company or entity does well, nor do they receive less if it does poorly. They receive a fixed schedule of payments. Bonds are generally investments that have both lower risk and lower return.

Cash and cash equivalents, like savings, money market funds or treasury bills generally are considered the safest of investments, but therefore offer the lowest return of the asset classes.

Knowing about your asset classes is the first step to determining your asset allocation. Check in tomorrow for information on how diversification helps in asset allocation decisions.

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
OneBite Editorial Staff
OneBite Editorial Staff

OneBite® is a Top 50 Financial Advisor Blog powered by Hewins Financial Advisors. Founded in 2011, the digital magazine is dedicated to providing intelligent, in-depth coverage and analysis of the top financial and economic issues facing investors today.

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Become a savvy investor – Are your eggs in one basket?

time to read: 2 min