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Asset Classes and Their Characteristics

Investments are financial assets because their payoff or return is in money.  However, tangible assets such as real estate or collectibles such as art are non-financial assets because their return is in their utility or enjoyment rather than money.

Asset classes are the category of investment to which you are providing your money with the expectation of a financial return on the amount you provided to the other party for use.  An asset class includes groups of investments with similar characteristics, that behave in a similar manner.  Each asset class reflects different risk and return investment characteristics, and is expected to perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification (investing in multiple asset classes.)

Investment strategies can be based on income, growth, value, or a variety of other factors that help to identify and categorize investment options based on a specific set of criteria.  Investors seek to generate a return on their investment and receive more money back from the person or entity to which they provided their money.  This is return on investment.   A more recent term, Alpha, is the return on investment exceeding that which would normally be expected for that type of investment as compared to a market index used as a benchmark. 

Fixed Income investments are investment contracts between the investor (lender) and the borrower, who agrees to make payments to the lender on a predetermined payment schedule at a level of interest determined in the contract.  Fixed Income contracts may pay periodic interest based on a fixed or floating interest rate (coupon bonds purchased at face value) or may return the face value amount at maturity based on a discounted purchase price (zero-coupon).  Within the fixed income asset class, examples of sub-classes include U.S. Treasury notes and bonds, U.S. government agency securities, municipal bonds, corporate bonds, mortgage and other asset-backed securities, unsecured notes such as debentures and convertible bonds, preferred stock and others. 

Cash equivalents, such as U.S. Treasury bills, commercial paper, money market funds, short-term government bonds and other short-term marketable securities such as banker’s acceptances are often considered a separate financial asset class.

The other primary class of investment is Equity investments.  Equities are not based on a contractual obligation. Instead, the investor is an equity-owner and has a varying stake in the firm based on the amount invested and the fraction of ownership that investment represents.

Equity investments are often associated with ownership of shares of common stock; the fractional ownership of a firm.  In addition to common stocks, ownership in equities may also arise from investments in derivative securities such as options or warrants.  An option gives the purchaser the right to buy (call option) or sell (put option) shares of common stock.  The value of the option is derived from the value of the common stock. 

Futures are an agreement to exchange money for an asset at a specified delivery date.  Most commonly futures are associated with commodities, but futures contracts on financial instruments are also available.

Each asset class has its own return and risk characteristics.  Generally, and legally, bond holders have a higher expectation of return of their principal and interest than equity holders.  In exchange for this contractual indenture agreement, bonds and other fixed income investments generally provide a lower rate of return on investment with lower variation in price/value than for equity investments.

Equity investments provide the potential for greater return on investment than fixed income investments, but generally have greater variation (volatility) in market price/value.

Because Fixed Income and Equity investments are fundamentally different, it a generally held belief that investing in a diversified portfolio of stocks and bonds generates the best investment results over a long period.

You can usually expect that for a given level of risk, a diversified portfolio should outperform an undiversified portfolio over the long term. With exposure to multiple asset classes, each with unique returns, risks, and correlations to one another, we expect the individual asset-class components to perform differently over periods. Therefore, we can strive to achieve a higher level of return by taking the same risk because of this diversification benefit achieved.


Information provided by Treybourne Wealth Planners should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. 

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. 

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