Investment advice helps you achieve your goals. You identify your goals, (i.e. retirement income, travel, home remodeling) approximate costs of these goals, time frame and your comfort level with investing. A plan is created and you invest your money in the stock market. Your money grows over time and and pays for these future goals.
The stock market, your goals and comfort level with investing can change over time. So reviewing and discussing these topics is ongoing and important.
Your money is invested into 5 different categories or asset groups. Determining how much money or percentage of money is invested into each fund group is part of your plan.
Each asset group has a place in your overall portfolio. Each has unique risks and rewards. Here are the 5 assets groups:
1) Cash fund: It’s important to have some cash (anywhere from 3 months to 1 year living expenses). This cash pays for unexpected expenses or emergencies. You’ll sleep better knowing you have cash available for emergencies. You’ll have a sleepless night if your car suddenly breaks down and you have no money to repair it. You make minimal money investing in cash. So you have no risk and no reward. However, you hold on to some cash and call it your “rainy day” fund or “peace of mind” fund.
2) Bonds funds: Bonds are debts or loans issued by the government or corporations. You lend the government or company money. They pay you dividends. Bonds are good “shock absorbers” to stocks. They don’t fluctuate as much as stocks. They have a little more risk and reward than cash. The last 10 year annualized average bond fund return is about 3.4%.
3) Balanced funds: Balanced funds are stock funds that have a combination of stocks and bonds in them. The fund is a “balance” of various percentages of stocks and bonds. Balanced funds are the most conservative stock funds. They have slightly more risk than bond funds. The last 10 year annualized average balanced fund return is about 9.9%
4) Growth & Income funds: Growth and Income funds usually consist of a combination of large growth and value stocks. Unlike balanced funds, growth and income funds do not contain bonds. They are considered a safer and more conservative stock fund because they attempt to pay you dividends or income. They have more risk and reward than balanced funds. The last 10 annualized average growth and income fund return is about 14.2%
5) Growth funds: Growth funds focus on growing their size. Unlike growth and income funds, they provide minimal income. Their success depends on their stock positions increasing in value. Growth funds have more risk and reward than growth & income funds. The last 10 year annualized average growth fund return is about 17%.
Another way to understand these 5 asset classes is to view them from a risk/reward pendulum.
Cash has the least risk and reward. On the other end of the pendulum, growth funds have the most risk and reward. What is your comfort level along this pendulum?
You determine your comfort level and invest accordingly.