Understanding Different Asset Types

Stocks, also called equities, represent ownership in a company and its future profits. As a company’s perceived value rises and falls, the value of its stock rises and falls.

While stocks often experience more short-term volatility than some other asset classes, they have historically provided higher long-term returns than nearly every other asset class. This can be very important for investors whose financial goals require long-term growth.

A bond, also known as “fixed income,” is effectively a loan an investor makes to an issuer. The issuer can be a company, government or other entity. The bondholder lends the issuer the face value of the bond for a stated time, or “contract period.”

The issuer promises to repay the principal plus interest. At regular intervals, the issuer makes fixed payments to the bondholder.  The issuer also repays the principal amount at the end of the contract period, when the bond reaches its maturity date.

Bonds generally provide lower short-term volatility than stocks, which may be beneficial for investors with shorter time horizons or specific cash needs.

Mutual funds are investments set up to manage a pool of money from various investors. Individual investors have no control over investments within the funds.

There are many types of mutual funds available, all with their own fees and costs. Investors with large portfolios could be sacrificing returns and tax efficiency when they hold mutual funds in a retirement account.

Exchange-traded funds (ETFs) are similar to mutual funds. They pool money from many investors to purchase a diversified portfolio of stocks, bonds or other securities. Many ETFs seek to mirror the performance of a particular index, sector or asset class.

ETFs offer a potentially affordable way to achieve some level of diversification, especially for investors with smaller portfolios. Lack of personalization and the risk of overdiversification are potential drawbacks of ETFs.