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Asset Classes

When investing, you may hear references to "asset classes." Assets are various types of securities available to you to choose from as an investor, each with its own characteristics, as well as ranges of risk and reward. Each "class" is a group of securities with similar characteristics. When building a portfolio, there are five basic asset classes you should be familiar with:

Stocks

Stock represents fractional ownership of a company. Sometimes stocks are referred to as equities, similar to equity in a home. They are priced based on the valuation of the company.

Pros

  • Stocks represent partial ownership in a company so you may share in any profits.
  • Stocks typically perform well during economic expansion.

Cons

  • Price changes can be quite volatile compared with fixed income securities
  • Stocks may become worthless if the company goes bankrupt.

Bonds

A company or government can raise capital by borrowing and incurring debt. They can do this by issuing bonds or other debt instruments to investors.

Pros

  • Generally provide a more stable value, compared to equities
  • Have a mandated repayment schedule
  • Tend to hold value better than other asset classes during economic declines
  • Typically offer a steady, regular cash flow

Cons

  • Generally provide a lower expected long-term return on investment
  • Certain bonds can mature early, and the investor may not be able to find another bond paying the same level of interest (reinvestment risk)
  • Many bonds are issued with long-term (more than 10 years) maturities

Stocks vs Bonds

If a company grows, stock prices would be expected to increase, while bondholder participation is fixed at the return of their principal plus the agreed-upon interest rate. If the company loses value, stock prices would be expected to drop. Meanwhile, as long as the company does not file for bankruptcy, bondholders would still receive the amount of funds they lent, plus interest.

Cash equivalent securities

Cash equivalent investments include savings accounts, money market certificates, and commercial paper.

Pros

  • Typically reach maturity in a shorter period than other forms of investments
  • Trade in liquid markets or otherwise easily converted to cash
  • Are less subject to price swings than longer-dated bonds

Cons

  • The interest rates paid are usually relatively low
  • Given the low rates, holding too much cash can be seen as an opportunity cost relative to other investment options

Real assets

Real assets are interests in tangible assets, which have value due to their substance and properties and have been favored during inflationary times. Real assets can play an important part in an investment portfolio—including conservative and income-oriented portfolios. Real asset exposures tend to represent an ownership interest (real estate investment trusts, mutual fund, or possibly futures or other derivatives) and include:

  • Commodities, including precious metals (gold, silver, etc.), industrial metals (steel, iron, etc.), agricultural products (wheat, sugar, etc.)
  • Real estate, including Real Estate Investment Trusts (REITs) and other property interests
  • Inflation-linked bonds, including domestic and foreign issued bonds

Nontraditional assets

Typically used to help diversify a portfolio, nontraditional investments are generally grouped broadly into two categories—hedged strategies and private markets.

  • Hedge Funds: A range of strategies that seek to earn a return that is not solely dependent on markets increasing in value
    • “Liquid” hedge funds are mutual funds, offering next-day liquidity
    • Hedged strategies are often accessed through private funds (covered in our next module), which may offer some liquidity, though often with significant limitations, such as 1 or 2 year lock ups, gates, and only quarterly redemptions.
  • Private Markets: A long-term investment in assets that may not be traded in public markets and do not provide the ability for investors to liquidate

Hedge strategies are offered in relatively liquid mutual fund investments that can be available to all investors and also in private fund structures that are only available to qualified investors who are deemed sufficiently sophisticated to assess, or engage a professional to assess, the potential benefits and risks of such offers. Private markets are typically available only to qualified investors via private funds. To qualify for private placements, investors must meet the accredited investor standard and often also the qualified purchaser standard, both of which are imposed by regulators based on income and investable asset thresholds, among other considerations, as a proxy for sophistication.

Important considerations while investing in asset classes

Investing in business cycles
One of the reasons why investment managers spend time analyzing and forecasting economic trends is that certain asset classes have historically performed better in certain economic conditions.

As you can see from this graph, stocks are preferred when the economy is expanding, but bonds are preferred when the economy is declining. Also, particular types of stock have performed better at different stages in the cycle.

Different Types of Investments

Have performed better at different stages of the economic cycle.

Costs associated with investing

Depending on the asset class or investment type, some institutions may charge various fees. These include:

  • Account set-up and annual maintenance costs
  • Fees for not maintaining a minimum balance
  • Commissions to brokers as a percentage of the products sold
  • Markup on shares purchased through a middle-man
  • Borrowing for short-sale or margin purchases
  • Asset management fees
  • Capital gains taxes

Contact

To determine how Wealth Compass can help meet your objectives, please contact Senior Investment Advisor Will Bennett, Senior Investment Advisor Lara Coviello, or your Wilmington Trust advisor.

Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation including, but not limited to, Manufacturers & Traders Trust Company (M&T Bank), Wilmington Trust Company (WTC) operating in Delaware only, Wilmington Trust, N.A. (WTNA), Wilmington Trust Investment Advisors, Inc. (WTIA), Wilmington Funds Management Corporation (WFMC), and Wilmington Trust Investment Management, LLC (WTIM). Such services include trustee, custodial, agency, investment management, and other services. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, Member FDIC.

This commentary is provided for educational purposes only, providing a high-level introduction to investing concepts and terminology. It is not intended to provide all of the nuances of strategies that may be available in the marketplace; thus descriptions of features, risks, and potential benefits are intended to be generally representative and not comprehensive. Similarly, this material is not intended as an offer, recommendation or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. There is no assurance that any investment strategy will be successful.

Third party information incorporated into these materials has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Opinions, estimates and projections constitute the judgment of Wilmington Trust and are subject to change without notice.

Investors should consider the investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information about an investment company and is available from your financial advisor. The prospectus should be read carefully before investing.

Investment products are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by Wilmington Trust, M&T, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds.

Wilmington Trust is a multi-faceted financial services company offering a broad range of services, including financial services and investment products provided by affiliates. While offering affiliated products and services in client solutions generally is intended to ensure a cohesive client experience, certain inherent conflicts of interest exist. These include, where applicable, the general incentive of expanding the firm’s brand and presence in certain markets, including assets under management as well as the incentive of incremental service fees, advisory or management fees, administrative fees and, in some cases, sales or incentive fees. The use of affiliate products and services could introduce a conflict of interest in future recommendations where such recommendation might involve products and services where Wilmington Trust and its affiliates collectively earn less in fees.

Emphasis on qualitative factors in the manager selection process is likely to result in the availability of investment strategies managed by affiliates of M&T Bank on our service platforms, and may influence specific recommendations. In many instances, the use of such affiliate offerings can result in additional revenues to M&T Bank or the affiliate as compensation for investment management, execution, administration, or other services.

Investing involves risks and you may incur a profit or a loss.

Diversification does not ensure a profit or guarantee against a loss.

Past performance cannot guarantee future results.

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