Asset Allocation & Investing
In WW5 I covered at a fairly high level the basics of asset classes. Specifically I reviewed the long term investment returns you would have achieved by investing in the three basic asset classes of stocks, bonds, and bills.
Important to note is the return increase both before – and after – inflation. Stocks return twice what bonds do, and 3.5 times what bonds do AFTER inflation erodes your purchasing power.
(PS do you enjoy these? Email me a question and I’ll try to cover it on an upcoming video.)
Investing In Stocks – Volatility
I went on to explain the reason stocks have earned more is they have no promise to repay any principal or interest. They’re simply ownership in a company.
Bonds on the other hand, are loaning a company or entity money. Investing in stocks carries a great deal more volatility than investing in bonds because of this fact. Put simply, there’s more investment risk and investors require a higher return for taking on more risk.
Asset Allocation & Rebalancing
Finally I covered a very basic asset allocation plan. In this simple plan, I discussed only stocks and bonds/tbills.
In reality you’ll be investing in many more asset classes such as emerging markets, real estate, commodities etc. After you create your asset allocation plan your assets will fluctuate, so it’s important to rebalance your investment portfolio over time.
Investing in the stock market isn’t easy, so it’s important to know the fundamentals. If you have a conceptual knowledge of the basics it will help you remain a grounded investor for years to come!