Category: Asset Allocation

What is an asset class?

Financial professionals constantly talk about asset classes, but what does that mean?  In the broadest sense, asset classes refer to a group of securities that have similar risk/return characteristics.  So, for example, in the broadest terms, stocks, bonds and cash represent the three most common asset classes.  Each has different risk and return characteristics and behave differently in response to a variety of economic and political events.  Stocks react most to corporate profitability, bonds to interest rates and cash to inflation.     That does not mean that these are the only issues that these assets react to but they are the predominant ones.

Most managers divide these broad assets classes into subgroups that act differently at different times.  Stocks, for example, can be divided into large cap, small cap, foreign or domestic.  Bonds can be subdivided into government, agency, municipal, corporate, foreign or domestic.  These classes can be divided again into their own subgroups.   The challenge for the investor is to find ways of participating in these investments.  This is where the expertise of the professional investment advisor comes into play.

Why is this important?  Because investment management is often about risk control and this is often achieved by balancing various assets classes to achieve the degree of risk to which a portfolio is subjected.  Modern portfolio theory demonstrates that investment with low correlation to the rest of the portfolio can lower over-all volatility even if the underlying investment itself is volatile.


Is your college fund investment mix making the grade?

With college costs climbing faster than the general rate of inflation, many parents feel the pressure of saving for their children’s education.  Many parents don’t want to see their children saddled with debt when they graduate from college, but spiraling costs and “easy credit” have result in student loan debt in excess of $1 trillion.

One of the programs that allow parents (and grandparents) to save money for college is a “529 plan.”  A 529 is a tax-advantaged plan operated by a state or educational institution designed to help families set aside funds for future college costs. Created in 1996, it’s named after Section 529 of the Internal Revenue Code.

College savers typically have about 18 years if they start early to save for college.  Finding the right balance of investments in a 529 depends largely on the child’s age and your tolerance for risk.  If the child is young, the focus should be on growth and growth-an-income funds according to experts.  As the child gets older, the portfolio should become more conservative since there is less time to recover from a market downturn.

Each state sponsors its own 529 plan which differ in the investments they offer.  Some states also offer a modest tax benefit to those who contribute to 529 plans.  For more details, consult your RIA or check your state’s website  for more information.

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