In general, the more risk you are willing to take, the more the potential reward. A second asset group that moves up the risk:reward scale is Income. People have the mistaken idea that they don’t need this unless they are retired. But without this element, the average investor misses out on good returns over time. Most money market accounts alone do not pay enough in interest to cover inflation over a long time frame. That’s why the investor needs to look for a variety of income assets, different “types of eggs” if you will, for your income basket. These may take the form of “income” mutual funds such as bond funds. Many advisors prefer to put their clients in shorter-term bond funds that may lessen the interest-rate risk. These can also be straightforward investments such as bonds, utility stocks, financial stocks, energy stocks or real estate investment trusts (REITs).
REITs can provide good balance since they invest in actual real estate such as office buildings or apartment complexes where steady rent is paid. Also, the benefit of buying good dividend-paying stocks over time cannot be overstated. Not only do you get paid (usually quarterly) for your investment, but your stock may split over time giving you more shares and eventually more income. Most investors need to build a good portion of these over time for future retirement.
The third asset group and one with even greater risk is Growth. Many people ask why they should take the added risk of investing in growth stocks or growth mutual funds. The simple answer to this is that herein lies the greatest potential reward. If people simply keep the great majority of their holdings in cash, they will not keep up with inflation over the long run. Growth investments may be in growth mutual funds or individual stocks. Within this category, in particular, it is vitally important to diversify your choices. Large capitalization funds, mid-cap funds, smallcap funds, and international and developing market funds should all be considered. None of these markets return the same from year to year and no one knows which market will be hot one year and cold the next. That is why it is so important to take advantage of many different types of markets, which can provide diversity within that asset basket.
