Asset Classes and Their Risk Levels

Developing a strong understanding of investments and identifying your financial goals can create a solid foundation for future financial independence and security. However, with all the noise and trends about investing popping up socially, online, and in the news, it is increasingly common these days for people to not know where to begin or how to approach this. Having too little money set aside for retirement and not investing it properly can disrupt your ability to generate a steady cash flow for your future. 

To begin with, you can define the different types of strategies that align to your financial goals and risk appetite, which can be accessed and use for positive cash flow and future retirement planning. A good starting point for this is understanding different asset classes, what they are, and the risks involved.

What Is an Asset Class?

An asset class is a collection of investments that perform in the same manner with the same risk level. For example, the most commonly known investment, stocks, is one asset class that represents an equity stake in a public corporation. A stock’s value rises and falls as due to numerous reasons such as monetary policies, natural disasters, company news, etc., which may put investors at high risk due to the subsequent volatility. The risk to you is that the market can drop at any time, and you need to know your risk tolerance for that before investing heavily in this asset class. 

Bonds

A second asset type is a bond. It is a fixed amount of money you purchase from a government or corporate entity at a specific rate of interest the entity promises to pay you over time. There is generally far less risk to you, as the bond is required to be paid back with interest at its maturity date, which can range from months to years. You, the investor, are unlikely to lose any money due to that payback requirement and can enjoy a fixed income due to the consistent entity payouts required by the bond. Bonds are generally considered very safe and solid investments.

Money Markets

A third asset class is a cash investment in the form of money-market accounts or certificates of deposits. These are highly liquid investments, meaning that you can pull your money out quickly if needed. There is little risk to the investment due to their highly liquid nature and, as a result, only a moderate potential for financial gain as interest rates are often not high.

Commodities

Commodities are raw materials used in the making of a final product that is sold in retail. An example would be copper, which enables our electronics to function. Another would be wheat, which is used in the production of food staples like bread. A third would be crude oil, the fundamental element in the production of gasoline. Coffee beans would be another.  

Investing in commodities can be risky as multiple political, social or natural events can adjust the supply of oil sold around the world in an instant. Sudden shocks in Middle East diplomacy can slow the flow of oil or the summer driving season in the US can increase it while a hurricane knocking out a refinery can reduce the supply of oil and send its unit price per barrel soaring. The commodity market can be volatile but also lucrative if you monitor world events carefully. 

Diversification is Key

Budgeting for investments is vital towards financial stability and a secure future. You can better prepare for your future by choosing a diversified investment plan, which can include a mix of some or all of the asset classes above. With SmartWealth, your investment plan is also tailored to your preferred level of risk, balancing the asset allocation for each one to ensure your investment journey is low-stress and simplified.

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