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Investing 101

The beginning of a New Year is a great time to review investment strategy to ensure you are on course to reach your retirement goals.  Understanding the basics is the first step. 

Asset Class

In its simplest form, the term "asset class" refers to investments having similar features.  The three major asset classes are cash, bonds, and stock. 

The beginning of a New Year is a great time to review investment strategy to ensure you are on course to reach your retirement goals.  Understanding the basics is the first step. 

Asset Class

In its simplest form, the term "asset class" refers to investments having similar features.  The three major asset classes are cash, bonds, and stock. 

  • Cash - Cash is a short-term debt instrument, or IOU, that can be converted into cash easily, with little or no cost or penalty.  Examples are: money market funds, checking accounts, certificates of deposit and Treasury bills.  Because cash investments are viewed as safe, the interest rates they pay are low and, over time, may not keep pace with the rate of inflation. 
  • Bonds - Bonds are debt securities, or IOUs, issued by corporations or governments in exchange for money you lend them.  In most instances, bond issuers agree to repay their loans by a specific date (the "maturity") and make regular interest payments until that date.  This is why bonds are often referred to as "fixed-income" investments.  The longer a bond's maturity, the more its price will be affected by changes in interest rates.  Because of these price fluctuations, bonds are considered more risky than cash investments.  However, over time, bonds have provided slightly higher returns and a slightly better hedge against inflation than cash investments.
  • Stocks - Stocks represent part ownership, or equity, in a public corporation.  If the company prospers, you, as a stockholder, share in its profits (usually in the form of dividends) and benefit from any rise in the market value of its stock. However, if the company runs into problems, the value of your investment could decline.  Because their prices tend to fluctuate suddenly and sometimes sharply, stocks are considered more risky than bonds or cash investments. Over time; however, stocks have offered the highest returns of the three asset classes as well as the best hedge against inflation.

Risk

For most investors, the concept of "risk" can be summed up in one question, "What's the chance I'll lose money?" The key element in any investment strategy is the trade-off between risk and reward.

Simply put, to seek greater rewards such as a higher investment return, you must be willing to accept greater risk.  If you wish to minimize risk, you must be willing to accept lower returns.

Of the three primary asset classes, cash investments typically pose the least risk, bonds a medium risk and stock the greatest risk. However, cash investments offer the least rewards, and stocks have the potential for the greatest return.

Asset Allocation/Diversification

Diversification simply means, "Don't put all of your eggs in one basket."  Technically, asset allocation is the process of distributing your investments across asset classes in an attempt to moderate the ups and downs of the market.  By spreading your investments over all of the asset classes, you may lower your risk and improve your rate of return over time.  Both DMBA and TIAA/CREF offer preset-mix options that diversify investments over the major asset classes for you.

Whether you choose your own mix or one of the preset options, diversification is one investment concept that has proven successful for many investors. 

For assistance or more information, contact Benefits Services at D-240 ASB or, by telephone, 422-4716.

Updated by the HRS Web Team, Brigham Young University, Provo, UT 84602 - Copyright 2008. All Rights Reserved.