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 a company, government and other entities (“issuers”).A bondholder lends the issuer the face value of the bond for a stated time period (i.e., the bond’s maturity.

The issuer promises to repay the principal plus interest, with payments of fixed rates at regular intervals. 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 of the investments within the funds. There are many types of mutual funds available—each with their own fees and costs. Investors with large portfolios could be sacrificing returns and tax efficiency when using mutual funds in a retirement account.

Exchange-traded funds (ETFs) are similar to mutual funds, pooling 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. Pitfalls of ETFs include lack of personalization and the risk of overdiversification.