Many people struggle to start investing or to manage their investments because there’s so much to learn. There are countless unfamiliar terms, and even if you know what the terms mean, there are options and options to choose from when investing your money in the markets.
To help you with your education regarding personal finances and seeking to strive to grow, manage, and preserve your wealth, we’ve created this simple guide to help you understand basic asset classes and how different asset classes can help diversify your portfolio.
Investing in growth assets relies on a strategy of investing in stocks that are currently overvalued, but with the anticipation or prediction that the company you’re investing in will continue to grow. Growth stocks have higher than average price-to-earnings (PE) ratios, but may carry much more risk than value assets because no one can accurately predict the future.
Value assets, on the other hand, are stocks that are undervalued in the markets for one reason or another. For example, some investors may see an otherwise well-respected, stable company undergoing a short-term crisis, such as a negative public relations event. Because the company has a good reputation or has otherwise convinced investors of its reliability, its low-priced stock is expected to rise back to normal in the future. Please note that value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Growth assets and value assets are often pitted against one another as “either/or” investment strategies, but this isn’t necessarily the case. Investors on both sides of the fence are attempting to buy low and sell high, but are going about it in different ways. Some investors even choose to include growth assets and value assets in their portfolios to further diversify their holdings.
The term core assets describes the key investment vehicles an investor holds in his or her portfolio, most commonly including stocks, bonds, mutual funds, and exchange traded funds (ETFs). Stocks are securities an investor purchases to own a small fraction of a company, whereas bonds are essentially loans held by the bondholder which are expected to be repaid—with interest—by the company selling the bonds.
Mutual funds and ETFs are essentially pools of funds from multiple investors to invest in securities like stocks, bonds, and other types of assets. Mutual funds are portfolios that are managed by professional money managers who attempt to allocate the investments within the portfolio to produce the objectives stated in the mutual fund’s prospectus. Stock and mutual fund investing includes risk, including fluctuating prices and loss of principal. ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs Carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
ETFs are similar to mutual funds in that they pool money from many investors, but ETFs are a type of algorithmically driven security that tracks an index, sector, commodity, or other types of assets. For example, some ETFs track the S&P 500 to mimic its performance. ETFs can be more cost-effective than purchasing individual stocks or mutual funds.
To understand the next three asset classes, we must first define market capitalization. Market capitalization—or market cap—is the value of a company’s total dollar market value of outstanding shares of stock. A company’s market capitalization is calculated by multiplying the number of outstanding shares offered by the company with the current market price of one share.
Therefore, small-cap assets describe shares from companies with relatively small market capitalization. Although thresholds for small-cap assets vary, it’s generally understood that small-cap companies’ market capitalization value falls between $300 million to $2 billion. Historically, small-cap stocks have outperformed large-cap stocks. (1) But small-cap stocks are also riskier and more volatile than stocks from mid-cap and large-cap companies.
Mid-cap is the term that generally refers to companies with a market capitalization between $2 billion and $10 billion. Falling between small-cap companies and large-cap companies, mid-cap stocks are often desirable for portfolio diversification. Investors expect mid-cap companies to increase profits and market shares, but they can be less volatile than small-cap companies.
Large-cap companies, also referred to as big-cap, have a market capitalization of $10 billion or more. Large-cap stocks offer stability to a portfolio, but they’re less likely to offer large returns. At the end of 2020, large-cap companies accounted for almost 92% of the U.S. equities market and include notable companies such as Apple, Microsoft, and Amazon. Large-cap companies are more likely to pay dividends than small- or mid-cap stocks due to their size. Dividend payments are not guaranteed and many be reduced or eliminated at any time by the company.
Partner With A Professional
We know that when it comes to investing your money, there’s a lot to learn. If you’re feeling overwhelmed by the decisions in front of you, we encourage you to partner with a professional financial advisor like our team members at Nichols Financial Strategies. We educate you about your options and help you strategize the optimal allocations for your investment portfolio. Reach out to us at 559-440-6999 or by email at email@example.com to see how we can help.
Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.
Matthew Nichols is a Registered Representative with, and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.